A financial instrument which takes on the value of another asset which can be subjected to trading in a regular and regulated exchange market is known as an exchange-traded derivative. It does not have any value of its own. These derivatives are over-the-counter variables and very useful for countering risks and help in speculation of a wide range of assets and commodities in the market.
Since these derivatives are popular in modern financial systems, it is well worth a look at their comprehensive merits and limitations too to understand their way of functioning.
The advantages of exchange traded derivatives:
- Any investor looks to maximizing his returns while minimizing risks. This is the common goal of any investment venture. The exchange traded derivatives help in reducing the imminent risk of any investment venture to a minimum, thereby acting as a counterparty to any transaction and cushioning the effect of risks on the exchange derivative transactions.
- The derivative is a financial instrument which has standardized terms and conditions for each specific derivative contract. This helps the individual investor determine the number of contracts that were purchased or sold during a given period. The value of the individual contract is usually less and hence the risk seems less intimidating for the small and novice investors.
- The exchange or over-the-counter derivatives are useful in the case of small institutions that do not meet the requirements for a listing in any regulated exchange. Such derivatives open the prospects for investment in different markets.
- Experts do the risk management as in the case of crowdfunding platforms like the FinCrowd app.
- The above-mentioned points only imply that the small investors and firms get to benefit from the risk minimisation. There is a lesser financial burden because of the transparency involved; plus, the benefit of reduced administrative expenditure.
- The financial markets are highly speculative and volatile; therefore, there is the scope of fraudulent practices and lack of integrity in transactions.
- When people use an automated robot software like the FinCrowd app the nature of risk cannot be assessed by individual small investors and hence they could end up incurring heavy losses.
- These derivatives are not preferred by large institutions because of the large number and variety of contracts that they may deal with and standardize every small derivative contract is not a feasible option.
The exchange traded derivatives are popular modern instruments. However, there is a need to introduce transparency in the system to make them more viable investment options for small investors who look for regular and reliable investment opportunities.