![]() ![]() In this way, you are benefited by the differences in prices of the commodity in the two different markets. Arbitrage advantage:Arbitrage trading involves buying a commodity or security at a low price in one market and selling it at a high price in the other market.Why do investors enter derivative contractsĪpart from making profits, there are various other reasons behind the use of derivative contracts. ![]() Or simply cushion yourself from the losses in the spot market where the stock is being traded. In this situation, you may enter a derivative contract either to make gains by placing an accurate bet. You may suffer a loss owing to a fall in the stock value. Imagine that the market price of an equity share may go up or down. The basic principle behind entering into derivative contracts is to earn profits by speculating on the value of the underlying asset in future. The value of the underlying assets keeps changing according to market conditions. The commonly used assets are stocks, bonds, currencies, commodities and market indices. Derivatives are financial contracts whose value is dependent on an underlying asset or group of assets.
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