Derivatives?

Comments welcome even the briefest thank you.


I have been very annoyed when people in TV talk about Derivatives. They expect us to know this term. May be I am slow. I think now I understand it as a bet. Wikipedia defines it as:

A derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.^[

Investopedia describes it as:

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Now I am geting a wee bit of understanding about this very elusive subject ( as many people seems to lose and win).

Joshep B Dahl from World Group Mortgage, LLC says

Derivates involve the trading of rights or obligations based on an underlying product, without necessarily directly transfering that underlying product

Still confusing or what may I ask?

OK now imagine a horse race I who takes a bet on the race is the buyer and the Race Tract is the seller. . After the transaction the seller is obliged to pay the buyer a certain amount according to the odds specified. These odds are called the underlying variables depending on the amount of money the Tract gets from the amount of money paid as bets.

Similarly a farmer can sell next years crop at a cetain amount of money to a bank, hedgefund etc. If the per unit price agreed drops bank loses that amount. If the price goes up the bank wins. Farmer vice a versa.

Further more, If I know someone is going to burn down his house, by using cadles only, I can take an insuarence policy to say that the house will be burnt down in a specific time. But I cannot take insuarence policies on another person or someone else's property. Then again a derivative can be arranged onsome elese company, a bank, a deal or another derivative. but this system is not regulated anywhere in the world, though it is legal in almost all top dog world.

I am a selfish person. If you cannot find the links in this blog, I have majority of them filed, Email me!More and more I dive into this more it gets confusing. Gosh.