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).

Concept And Definition Of Economic Sociology

The economic sociology regarded economic action as a form of social action. In contrast to modern economic theory, it does not go out of the benefit calculation of the individual. Economic decisions and transactions are influenced by social influences and collective patterns of interpretation. Social background, norms, routines, networks, organizations and institutions to go from the perspective of economic sociology not only as a cost in the rational calculation of economic operator a, but provide only the action orientation of the actors. 

Accordingly, markets and companies will not be understood as an aggregation of individual decisions, but as a social order with embossing force for economic activity. It builds the economy sociological critique of the theoretical assumptions of the standard model of economic theory on:

Uncertainty and coordination problems

The Homo economics of economic theory makes decisions in accordance with the utility maximization. But economic decisions are very often decisions under uncertainty, i.e. the actions and reactions of the other players in the market or within the company are unpredictable for individuals. The determination of expected values or transaction costs does not solve the problem because the response patterns of the other market participants in many situations themselves are too complex and unstable to be calculable risks as having a stable expected value. 

Thus, utility-maximizing decisions cannot rationally calculate and there are systematic coordination problems that arise from the unforeseen contingency of action of the stakeholders and environmental changes. Given this uncertainty orient economic actor is to routines, networks or social norms and institutions. This economic rationality remains a socially and culturally defined space limited regarded as relevant information, which changes with the historical context and the specific situations of action. Coordination processes in markets and companies cannot be derived from the individual decisions of the players, but only through the involvement of the social context.

The problem of unstable preferences

After the theoretical economic model of homo economics, the market players make their decisions based on a fixed order of preference that reflects the subjective value system of goods and services. Reviews and preferences, however, are changing endogenously through interaction on the market or in companies. Affect advertising and marketing, but also the situational, spatial context of the exchange or the competition, as the actors’ goods, services and factors of production rate and to pay what price they are willing. 

Moreover, these weights are not necessarily the exchanged objects inherently, but depend on many markets, such as the arts or the financial markets, of the judgment of experts and thus of a complex communication process from. This means then also that the separation of fixed order of preference and situational decision cannot be maintained, but that the preferences of the actors may change depending on context at any time.

The problem of dynamics

Josef Schumpeter described that significant elements of capitalist economics such as profit, innovation, growth and crises with the equilibrium model of economic theory cannot be explained. On this conceptual gap of (static) economic theory is linked to the economic sociology. Especially for the modern economy are the dynamic elements of paramount importance. 

The same is true for economic institutions and organizations: they do not arise necessarily, such as suggested by the transaction cost theory, as effective solutions to coordination problems, but their origin and their transformation often follow paths to inner dynamics of the institutions themselves or external social and political influence can be recycled. Therefore, they are neither necessarily efficient nor stable. To shift the opportunities for buyers and sellers in the market is not only by exogenous shocks.

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