2 Financial markets permit the businesses and governments to raise the funds needed by sale of securities. The economy requires a sound financial markets for its proper functioning. Explain in detail on financial derivatives and the financial intermediaries
Answer:- Explanation on financial derivatives
Derivatives are financial instruments that have no intrinsic value, but derive their value from something else. They hedge the risk of owning things that are subject to unexpected price fluctuations, for example foreign currencies, commodities (like wheat), stocks and bonds. The term ‘derivative’ indicates that it has no independent value, i.e. its value is entirely ‘derived’ from the value of the cash asset. For example, price of a stock option depends on the underlying stock price and the price of currency future depends on the price of the underlying currency.
A derivative contract or product, or simply ‘derivative’, is to be distinguished from the underlying cash asset, i.e. the asset bought/sold in the cash market on normal delivery terms. The price of the cash instrument is referred to as the ‘underlying’ price. Examples of cash instruments include actual shares in a company, commodities (crude oil, wheat), foreign exchange, etc. Types of derivative securities, mostly appealing to investors are futures and options.
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