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Answer to Question 1 Financial Derivatives Market

   

Added on  2020-02-24

4 Pages719 Words161 Views
Running head: CORPORATE INVESTMENT ANALYSISCorporate Investment AnalysisName of the StudentName of the UniversityAuthor’s Note

1CORPORATE INVESTMENT ANALYSISAnswer to Question 1Derivatives market is considered as one of the major components of the financial market.The derivatives market refers to those specific markets where the transactions of financialderivatives occur. Derivatives refer to a specific kind of securities whose price is determinedbased on the price of underlying assets of the business organizations. Shareholders and othersdetermine the value of the derivatives based on the price fluctuations of the underlying assets.Some of the major examples of these underlying assets are bonds of the companies, stock of thecompanies, currencies of the countries, rate of interest, various commodities and different kindsof market indices. On a more specific note, derivatives refer to the contracts between two ormore parties and for this reason, some specific aspects can be used as the as the underlying assetsof the derivative market like weather data, amount of rain and many others. It can be seen thatthere are different types of classification of the derivatives; they are Future Contracts, ForwardContracts, Call Options, Put Options, Swaps and Credit Derivatives (Hirsa & Neftci, 2013).It is required for the correct reporting of the derivatives as the incorrect or wrongreporting of financial derivatives may deceive the investors in a large way. It can be seen thatfrom the wrong reporting of the financial derivatives, the investors get wrong information aboutthe financial market condition. Due to this incorrect information about the financial market, thedecision making process of the investors gets affected. As the investors of the companies getunreliable financial information from the market, the investors end up taking ineffectiveinvestment decisions. Thus, this process leads to the incorrect reporting of the financialinformation. It needs to be mentioned that the incorrect reporting of financial informationdeceives the investors as difference can be seen between the implied risk and returns. Thus, it

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