Derivatives are financial instrument which allow people to take risk of future price and then create trade of a commodity, loan and mortgage. It has come into practise several years ago. At that time it was used as a hedge against risk but unfortunately today it has changed to very risky and unregulated usage for same. If you want more detailed information on this subject then you can visit www.jobenomics.com
Several years ago, derivatives started due to risk in the agriculture sectors. Small farmers never had money to put in their fields like buying seeds. Before the planting season starts they had to go to the merchants and sell their crops for some discounted price. In return merchant used to give them money in advance and again sell that crop to the grocers for a price which included his profit. Here both the parties derived at a fixed price. This was the beginning of the concept of derivatives.
At that time this situation was very common and because of this facility a farmer got money for his plantation. There were many people involved in this process.However there was one risk involved in the case of drought or flood where there may not be any substantial growth of crops.
According to Warren Buffet, derivative is a financial weapon of mass destruction. This was his opinion in the year 2003 and he was right as 2008 -2009 recession was because of unrealistic usage of derivatives. Today even after experiencing recession, derivative is still popular and a part of our economy.
Most of the people in our country are not aware of Derivatives. Very few people know the real meaning of derivatives. In the Wall Street, a derivative is used as a financial instrument and for common people who stay in Washington, derivatives are the political problem which brought down the US economy. The website www.jobenomics.com will give the correct meaning of the current situation to the common people.
The US government is the largest trader of derivatives in the global secondary market and this is the main reason of the collapse of the US financial system. Today real estate derivatives are their main source of income when it comes to home mortgage. They get very high amount in the form of fees and guarantees.
When a person puts his money in derivatives, he is actually placing a bet that the value of that commodity or a real estate will increase or decrease in future by an amount after a certain period of time. While buying it both the parties will sign a contract that they will buy or sell an asset in the future. One of the most important things in this contract is that for selling an asset a seller need not be the owner of the asset.
There are many types of derivatives but the most common derivatives are futures in which you need to do futures contract. It allows the owner to buy or sell the asset on a given date only. He cannot sell or buy the asset on any other day. The second most popular type of derivative is the options contract where the owner has an option to buy or sell an asset either before or on a prescribed date but for the specific rate.