Explain the types of assets and the type of transactions in the financial derivative markets. What is the purpose of the derivative investments? How does the leverage effect impact the derivative markets (explain both its advantages and disadvantages)? (35 pts)

Types of Assets and types of transaction in financial derivatives markets are-

A. Forward contracts are those contracts which will be customised in nature and they will be trying to provide an opportunity for various investors to hedge their exposure.

B. Future contracts are those contracts which are standardized in nature and they will be marked to market and they will be traded on the organised exchanges and they are having higher transaction transparencies and they will be offering a higher degree of hedging management.

C. Option contracts are those contracts which are derivatives contracts and they will be offering a right for the investors to exercise a certain number of buying or selling options at certain specific price before a maturity date and they will be non obligatory in nature.

D. Swap contracts are those contracts which will be offering with the higher degree of cash flow management and they will be trying to manage the risk associated with future cash flow payments or receipts and they are not traded on exchanges.

Purpose of derivative instruments are always focused at risk management through hedging and speculation and it will also offer the investors with a higher degree of transparency and customisation and standardization.

leverage will be trying to provide a higher degree of risk management and it will offer the investors to take higher degree of exposure in the market to maximize the rate of return and enhance their ability of management of risk as well as speculate through the lower amount of capital for maximisation of Return.