What are derivative financial instruments?
Derivative financial instruments (DFA) are financial instruments whose yield is based on the yield offered by another financial instrument or cargo, called active support (underlying asset). Therefore, the yield of the DFA is derived from the price evolution of the instrument, the commodity or other active. Derivative financial instruments can be developed based on any type of active / event, which has a random value / result, such as: gold, foreign currencies, shares, indices of grant holders, or even the atmospheric temperature(weather derivatives). The trading futures contracts and options represents a strategy complementary to the transferability of the instruments which constitute the underlying assets (listed shares, bonds, goods, etc.) for the management of a portfolio suitable for the desired risk of each investor. The trading by an investor for the first time a derivative financial instrument, lead to the initiation of the open positions (open position), such as: Purchase: Open Position Long; Sale: Open Position Short.
The participants in the markets derived
There are three main categories of participants (investors) which transaction derivative financial instruments: hedgers, speculators and arbitrageurs.
- hedgers are investors who have usually an exposure in the asset support (current or future) and uses derivative financial instruments to neutralize the potential risk in the case of the registration of a financial losses due to the unfavorable evolution of the asset;
- speculator are investors who have an opinion in what concerns the trend of the future evolution of asset price support and properly initiates a position in the market derivatives. For example, in the case of the futures contracts having active support actions, speculator operations shall:
Purchase (Long Position), where it is estimated that the price of the shares will increase in the future;
Sale (Short Position), where it is estimated that the price of the shares will decrease in the future.
The strategies used by speculator represents an investment with a high degree of risk with the objective of achieving a significant profit, unlike the use of strategies for investment in assets without risk (e.g.: Title of state) or the strategies of the arbitration board.
- arbitrageurs are investors who initiates the positions of the opposite direction in one or more markets in order to obtain a profit known at the time of conclusion of the transactions concerned (profit without risk). In the framework of the stock markets are effective, in which they operate a significant number of investors, the opportunities for arbitration are relatively small and "disappear" quickly. They are generally participants which fall into the category of financial institutions (e.g.: investment firm or commercial bank) which have easy access to the sources of finance and which usually do not pay commissions significant operating in their respective markets as intermediaries authorised. Therefore, the profit obtained from the use of the strategies of arbitration is generally low, this strategy is not always suitable for medium-sized investors or retailers who, unlike the intermediaries authorized, must pay for operating costs.
"Firmo is in the process of creating an alternative infrastructure for financial contracts [which is/will be] transparent, fair and trustless. In our view, the application of financial services is a particularly interesting use case for distributed ledgers. Financial assets are abstract products, deriving their value from the ongoing price-discovery mechanism on the markets. Indeed, financial operations are essentially a series of transfers of value between counterparties, at selected time intervals, governed by certain conditions... When mistakes happen in the conventional financial markets, we trust our service providers to resolve the issue. When mistakes occur in the construction of smart contracts, a technology that is supported by a vast network of nodes in consensus, resolving issues is a complicated governance process. FirmoLangis designed to be simple and secure. FirmoLang is formally verified, allowing tools for proof assistance at compile-time. This, in our view, is the most efficient way to produce secure code. FirmoLang is built on the insight that all financial instruments are reducible to the same triad of events: A series of transfers of value between counterparts, at selected time intervals, governed by a set of conditions like the price on the market or a counterparty calling an option." Source: https://www.firmo.network/resources/FIRMO_TechnicalPaper.pdf
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