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Questions and Answers
What is a financial derivative?
What is a financial derivative?
- A stock market index
- A commodity with high market demand
- A security whose value is derived from another financial entity (correct)
- A bond with a fixed interest rate
According to the text, what is the earliest reference to the application of derivatives in India?
According to the text, what is the earliest reference to the application of derivatives in India?
- 500 AD in a trade manual
- 15th century during the Mughal Empire
- 320 BC in 'Kautilya's Arthashastra' (correct)
- 1000 BC in ancient scriptures
Why did Kautilya describe the pricing mechanism of standing crops in 'Kautilya’s Arthashastra'?
Why did Kautilya describe the pricing mechanism of standing crops in 'Kautilya’s Arthashastra'?
- To set market prices for different crops
- To pay the farmers in advance using a true 'forwards contract' (correct)
- To simplify the tax system for farmers
- To regulate the trade of agricultural products
What is the relationship between the forwards and the futures contracts?
What is the relationship between the forwards and the futures contracts?
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What is considered as the default choice of a trader over the years?
What is considered as the default choice of a trader over the years?
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Study Notes
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.
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