What are derivatives?
Derivatives are (artificial) financial products that derive their value from another product (underlying). Such an underlying could be pretty much anything that can have a value, e.g. commodities, stocks, or currencies. Derivative contracts are traded for the future buying and selling of underlying. Derivatives can be binding for one person ((otc)option) or for both trading partners (in the case of […]
Shortly explained: What is hedging?
In its essence “hedging” refers to securing a portfolio against risks. To do so you invest in the derivatives market in products (eg. futures) that counteract the risks you want to avoid (e.g. interest risks or currency risks)
What is trading?
A trader speculates on market development (eg. price increase of a specific stock) by using derivatives (e.g. call futures on that stock). Usually, the trader doesn’t hold a (spot market) portfolio that needs to be hedged. He just buys/issues the respective derivates.
The Sharpe Ratio
The Sharpe Ratio is used to set the return of an investment in relation with its risk.In oder to caluclate the sharpe ratio you first deduct the risk free market rate from the performance of the financial instrument. The risk free market rate could be for example the Euribor in case of an investment fund operating in the EU. The […]