Asses valuation Essay Example | Topics and Well Written Essays - 2500 words

Asses valuation - Essay Example Futures: A firm agrees to deliver a certain amount of commodity in a specific date in future, that can be bought and sold at a particular price. These contracts are settled on daily bases on current market price. The future market price is depended on a continuous flow of information from all over the world which requires a high range of transparency. A huge range of factors are such as climatic conditions, political situation, debt fault, refugee, displacement, land reclamation etc. This kind of information in which the people tend to absorb it constantly and change the commodity prices is called price discovery. With the help of some future market the asset can also geographically dispersed, having lots of current price in existence, the contract price which has the shortest time to expiration can serve as proxy for the asset. Hedging is defined as a strategy to reduce the risk in market position while speculation is the position in the way the market move. Hedging and speculation strategies with the derivatives are helpful and enable the companies to manage risk more effectively (Cohen and Palmer, 2004, pp. 29-33). The derivatives do not involved risk but they redistribute the risk among various market participants. Derivatives can be hedge against unfavourable market movement for a premium and it provides opportunity for those who are keen to take risk and to make profit out of this process. It acts as low transaction cost because for high no. of participants are taking part in the market. Derivatives are categorized in two ways, if it put to use wisely than they work effectively but if it is used recklessly than it can cause you loss. Derivatives are used to protect hedge or it can be used by the market participants, it can also be used in market by the participants for speculating of the underlying asset. It can also allow the business to manage effectively, external influences on their