Identify and discuss this word “something.”
All derivatives are based on the random performance of something. Identify and discuss this word “something.”
You are required to reply to at least two peer answers. These post replies must need to be substantial and constructive.
The word “something” defines the underlying protection, security or asset on which the derivative depends. The derivative is the financial tool or technology which derives its value from the protection or security and underlying asset such as a commodity, stock, currency, index, or bond.
The underlying asset’s performance is a significant feature in defining the value of the derivative. The call option’s value depends on the underlying stock’s price. If the stock price goes up, the value of the call option increases, and if the stock price goes down, the call option’s value decreases.
Though, it is worth noting that not all derivatives are based on random performance. For example, some of the derivatives, such as futures contracts, are based on the expected future price of an asset rather than its random performance. In this case, the price of the derivative is determined by market expectations about the future price of the underlying asset.
Overall, while the underlying asset may not always have a random performance, it is true that the underlying asset’s performance plays a significant role in determining the value of most derivatives (Baxter & Rennie, 1996).
2-hadeel aldowsari :
Because each derivative is reliant on the unknowable outcomes of something else, the term “derivative” accurately describes the nature of these financial instruments. The success of another asset is directly proportional to how much value the derivative will have. When discussing this “something else,” it is customary practice to refer to it as the underlying asset.
Yet, the word “underlying asset” could lead one to the wrong conclusion. A few examples of underlying assets include commodities, currencies, commodities, and stocks and bonds.
On the other hand, the underlying “asset” can be something completely random, like the state of the weather. It is possible that the instrument in question is a futures contract, an option, or some other sort of derivative.