Purchase Solution

Traditional and derivative instruments

Not what you're looking for?

Ask Custom Question

What are the differences between traditional and derivative instruments?
Why do companies use derivative instruments? Are derivatives a good
investment? Why or why not?

Purchase this Solution

Solution Summary

What are the differences between traditional and derivative instruments?

Solution Preview

A traditional financial instrument is a trading security equity (stock) or debt (bond). A derivative financial instrument is different as it must have three characteristics.

The instrument has (a) one or more underlyings and (b) an identified payment provision. An underlying is a specified interest rate, security price, commodity price, index of prices or rates, or other market-related variable. Payment is determined by the interaction of the underlying with the face amount or number of shares, or other units specified in the derivative contract. For example, the university purchased a call option when ABC Inc. shares are trading at $100 per share. The contract gives the university the option to purchase 1,000 shares of ABC Inc. at an option price of $100 per share and expires in 120 days. When the stock ...

Solution provided by:
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
Recent Feedback
  • "Thank you. "
  • "Thank you"
  • "Thank you. I got 20/20 last week for my discussion you help me out with."
  • "Thank you. Great Job. "
  • "Thank you. Great Job. "
Purchase this Solution


Free BrainMass Quizzes
Learning Lean

This quiz will help you understand the basic concepts of Lean.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.