DERIVATIVES

In the world of finance (finance), a derivative is a bilateral contract or payment exchange agreement whose value is derived, or derived from the product being "basic reference" or also called a "derivative product" (underlying product), rather than trade or exchange the physical asset, market participants make a mutual agreement to exchange money, assets or a value sector in future by referring to the assets that became the principal reference.

Derivatives are used by management investment / portfolio management, corporate and financial institutions and individual investors to manage their positions against the risk of the stock and commodity price movements, interest rate, foreign exchange rates "without" affecting the physical position of the reference product (underlying ).

There are lots of financial instruments which can be categorized in groups of derivatives but the options / futures contracts and swaps are commonly known.

Option is a contract whereby one party agreed to pay compensation to the other party to a "right" (but not the obligation) to buy something or sell something to another party, such as only someone who worry that the price of the stock will fall XXX before he could sell it, he will pay a reward to another person (this is called a "seller" option / put option), which agreed to buy the stock at a price determined therefrom in front of the (strike price). Buyers use this option to manage the risk of falling value of the sale of stock XXX has, on the other side of the buyer the option might be to use the transaction option to receive fees and may already have a picture that XXX is not the sale value will go down.
As an opponent of the sale option is usually called call option or call option where the option was granted an option to the option buyer the right to buy the underlying asset (underlying asset) at a date agreed with the price of a predetermined or known as the strike option

Swap
Swap is a foreign term whose meaning is "exchange" but the term is also used in Indonesia in general
Swap agreements are two foreign exchange transactions through the purchase or sale of cash (spot) with the sale / repurchase is a term that carried out simultaneously with the same bank and at the level of premium or discount and exchange rates made and agreed on the date of the transaction.

Derivatives can refer to the various types of assets such as commodities, stocks or bonds, interest rates, currency exchange rates or indexes (such as stock market index, consumer price index (CPI-Consumer Price Index [), or even weather conditions or a derivative index others). Views from the assets referred to can set a price or time of payment.

The main usefulness of these derivatives is to transfer the risk or taking a risk depending on whether its position as Hedger (actor hedge) or a speculator. Diverse range of underlying asset value and produce a variety of payment alternatives derivative contracts traded on the market. The main types of derivatives are futures contracts (futures) contracts and transfer (forward), options and swaps.

Uses of derivatives

Insurance and hedging
One of the usefulness of derivatives is as a tool to transfer risk. For example, farmers can sell futures contracts to the speculators on the crop before harvest. The farmer to hedge the risk of increase or decrease the price of crops and the speculators accept this risk transfer in the hope of big returns. Sipetani know exactly the value of selling the crop to be obtained later and the speculators will get a profit if the selling price has increased but if the sales price has decreased and he will suffer losses.

Speculation and arbitrage
Arbitration or also known as foreign "arbitrage" can be interpreted as an act of taking advantage by exploiting the difference between an underlying asset and other assets such as reference by using the difference between the value of LQ-45 (ILQ-45) in Jakarta Stock Exchange (spot market) and the value KBIE ILQ-45 at the Surabaya Stock Exchange (futures market), so in addition to taking a position on the SSE, also must take a position on the JSE so that simultaneously taking opposite positions between the JSX and SSX.

Speculators may trade with other speculators as well as people who need hedging (Hedger). In general, the market transactions of derivatives markets are dominated by speculative trading than hedging trade in a very real sense.

Type of derivative contract
There are two types of derivative contracts that are recognized by the way of trade in the market, namely:
Derivatives exchanges outside also known by the term "(Over-the-counter (OTC) derivatives) is a bilateral contract (involving two parties) are carried out outside the stock exchange or without using a broker (direct transactions between the parties). Some products such as swaps, contracts and transfer exchange rate, and exotic options (exotic options), a derivative that uses features which will be more complex than commonly traded derivatives, such as vanilla options) are often traded without going through the stock exchange (OTC).

Derivatives markets without going through the stock exchange (OTC) is very big.
Derivatives traded on exchanges
or also called Exchange-traded derivatives are derivative instruments that are traded on stock specific trading derivatives (futures) or other exchanges. Stock derivatives carrying out its role as an intermediary in the transaction and collect the related initial margin (initial margin) from both parties who enter into transactions as collateral.

Examples of derivative
Economic derivatives: the value is paid based on economic data as statistics issued by a State agency

Derivative of energy: the value is paid based on a variety of energy price index, normally classified physically or financially, where physical reality is an agreement which is the physical delivery of commodities to be derivative of the energy (petroleum, gas, electricity, etc.)

Commodity

freight derivatives

inflation derivatives

insurance derivatives

weather derivatives

Credit derivatives

sports derivatives

Property derivatives