(Derivative-Concept) SBI PO 2017 GK with special reference to banking and finance

Derivative:
A derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate and is often called the "underlying“
FMC : FORWARD MARKET COMMISSION

SOME COMMON DERIVATIVES:

FORWARDS: a forward is a non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today

FUTURES: It is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price) with delivery and payment occurring at a specified future date, the delivery date

Futures v/s Forwards:The fundamental difference between futures and forwards is that futures are traded on exchanges and forwards trade OTC ( OVER THE COUNTER => OFF EXCHANGE )

Option:  It's a contract, or a provision of a contract, that gives one party (the option holder) the right, but not the obligation to perform a specified transaction with another party (the option issuer or option writer) according to specified terms.

Call options provide the holder the right (but not the obligation) to purchase an underlying asset at a specified price

Put options give the holder the right to sell an underlying asset at a specified price.

Swaps: It is a cash-settled contract between two parties to exchange (or "swap") cash flow streams.

Interest Rate Swap -

Currency Swap -

COLLATERALISED DEBT OBLIGATION: A CDO is a structured financial product backed by a pool of loans. The promised repayment of the loans in the pool is the collateral that gives the CDOs value; hence the term "collateralized."

CDS: A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer (the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event.