What Is Underlying The Derivatives Business?

The history of derivatives can be widely traced back to the 19th century, one of the still most important futures exchanges - the Chicago Board of Trade - was founded in 1848th Since then, derivatives are hedging - (hedging) or speculative purposes traded. Was it originally agricultural products or commodities, have been added over time many more options and futures.

An option or a future is always a derivative ( a derivative securities) is called a value-determining basis, the underlying. This underlying performs several functions:

 

1. The underlying describes the investment idea and is the rate determining characteristic

The price of the derivative moves - often reinforced with a lever - with a huge focus on the respective underlying value. A CFD as a right of the price change gets its value and its investment idea solely of the underlying! The term of the derivative ("secondary securities") and the design principle suggests.

2. With the underlying, various formulas for the fair market rate calculated

When you view a purchase option or a futures contract on an underlying asset, then the distance between the reference price and the actual market price of the Underlying has a multi-rate limiting function. Is in a qualifying for a purchase of a security or index of securities, the subscription price is lower than the actual market price, then the derivative has an intrinsic value. This intrinsic value is one of the components of fair market share price of the derivative.

Moreover, most derivatives have an additional value that the market is calculated that the issuer assumes the risk of price fluctuations with the high leverage of an option. This value is calculated from the remaining term of the option until the time of exercise or the last day of validity and the volatility of the underlying. The lower the validity period of the option, the lower the value a high volatility of the underlying asset affects increasing on the calculation of the fair value of.

3. The underlying is essential in the emission of the derivative

The underlying and its price at the issue of the derivative are critical to the launch. Think, for example, of the popular among investors’ warrants: Investors looking warrants with a specific lever and a distance between the reference price of the warrant and the current listing of the Underlying. The subscription price should not be too far away is the current listing to provide an opportunity for investors to generate capital gains with this speculation.

In summary, one can say that the underlying constitutes the decisive criterion for the performance of a derivative, and that the investor should start the selection of the derivative with the underlying and the market estimate (expectation rising or falling prices).