Important Points for IC 89 - Management Accounting Exam
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An option is also a contract to buy or sell an underlying asset at some pre-decided future date at a price agreed upon today i.e. on the date of entering into the derivative contract.
Financial risks are treated and managed by using certain hybrid financial instruments called derivatives.
Derivatives that act as a risk hedging tool for the investors are classified according to the underlying assets class and the risk-return attributes. The underlying assets could be: Stocks, Currencies, Stock Index and Futures on sensxe, Commodity, Interest bearing instruments and Weather derivatives.
The broad classification of derivatives is outlined below: Embedded Derivative, Commodity Derivative, Over the Counter Derivative and Exchange Traded Derivatives.
A future contract is a standardised contract between two parties to buy or sell a specified asset of certain quantity and quality for a price agreed upond today with delivery and payment occurring at a specified future date, the delivery date.
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