Understanding Financial Derivatives Quiz

Financial Derivatives

• A financial derivative is a contract between two parties that derives its value from an underlying asset, commodity, or security.

History of Derivatives in India

• The earliest reference to the application of derivatives in India dates back to Kautilya's 'Kautilya's Arthashastra', a 4th-century Indian treatise on statecraft, economic policy, and military strategy.

Kautilya's Arthashastra

• Kautilya described the pricing mechanism of standing crops in 'Kautilya's Arthashastra' to ensure that the rulers got a fair price for their crops, highlighting the value of price risk management.

Forwards and Futures Contracts

• Forwards and futures contracts are types of financial derivatives that allow parties to buy or sell an asset at a set price on a specific date.
• The key difference between forwards and futures is that forwards are customized contracts between two parties, while futures are standardized contracts traded on an exchange.

Trader Preferences

• The forward contract is considered the default choice of a trader over the years due to its flexibility in customization, allowing parties to negotiate the terms to suit their needs.