Financial Instruments Classification of Derivatives...

Introduction: Definition: A derivative is a financial instrument whose value is derived from the value of another asset, which is known as underlying. †¢ If the price of the underlying assets changes then the value of the derivatives also changes. †¢ Basically a derivative is not a product. It is a contract which derives its value from the changes in the price of those underlying assets. Example: The value of a gold futures contract is derived from the value of the underlying asset i.e. gold. Classification of Derivatives: Derivatives are classified in terms of their payoffs and as exchange traded and over the counters. †¢ Linear Derivatives:†¦show more content†¦In Mesopotamian derivatives must contained a description of the asset that has to be transferred ,description of the parties, the date of delivery and the price of transaction, and a description of witnesses as well. Mostly trading took place in the city centers and at the gates of the cities and at the temples. And they also offered warehouse facilities and they provided the quality and quantity measurement standards. In the Mesopotamia forward contracts on commodities played a vital role in developing long-distance trading. Derivatives Designed by Greek Philosophers: In history trace of derivatives can be found in Aristotle’s Politics. Aristotle tells the story of Thales (mathematician and philosopher) lived from 625 to 550 BC in Miletus (city of Ancient Greece). Thales predicted in wintertime an unusually massive olive crop. He seized the opportunity to negotiate with the owners the right but not the obligation to hire the entire crop in that region for the next autumn. Thales made a cash deposit to secure this right. It was as predicted that the demand for the use of this olive crop become rise. Then he was able to lease the presses at a considerable premium and made a wealth. 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