Characteristics of Derivatives

  • Derivatives have a maturity or expiration date after which they become worthless or automatically terminate.
  • A derivative is usually constructed by adding and combining basic components, specifications, triggers and contingencies in order to create a desired pay-off pattern.
  • Derivatives are powerful leverage tools. The value of a derivative can move exponentially relative to the value of its underlying.
  • There is no limit on number of units transacted in the derivative market because there are not physical assets to be transacted.
  • The derivative market is quite liquid and transaction can be effected easily.

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