How to Get Rich Quickly using Derivatives (Part 1)

Another post for "Instrument of Wealth"

What is Derivative?

It is a product whose value is derived from the value of underlying assets. The underlying asset can be equity, forex, commodity or any other asset. For e.g. if a dealer thinks that government may increase the rate of vehicles, he may wish to sell the vehicle on future date to eliminate the risk of a change in prices by that date. This is an example of derivative. The price of grain is derived from the underlying which is the spot price of vehicle.

I will try to explain 2 types of Derivatives viz. Futures & Options.

Futures

A future contract is an agreement between 2 parties to buy or sell an asset at future date at the mutually agreed price. These contracts can be closed earlier than the future date by entering into an equal and opposite transaction (sell if you have bought, or buy if have sold it earlier).

Options

An option gives the holder of the option the right to do something. The holder does not have to exercise this right. This is in contrast to Future, where the 2 parties have committed to themselves to doing something.


Note: There is a very high risk in this type. But also this can be considered as Get Rich Quick Scheme. I will take you through more concepts of Derivatives and tell you how to reduce this risk in coming posts.