Derivative market essay

Equity swap Currency swaps Forward contract: It is a non-standardized contract and according to our derivative market assignment help writers, it occurs between two parties to buy or sell an asset at a specified future time at a price agreed on today. As a result, XY is at long position and AB is at short position.

Derivative market essay

Get Full Essay Get access to this section to get all help you need with your essay and educational issues. An examination of these two methods indicate that the main distinction between the two derivatives is that in futures derivatives, the buyer has Derivative market essay obligation to buy or sell the commodity, whereas in options contract, it is merely an option to buy or sell the commodity.

Derivative market essay

The futures derivatives, since an exchange such as the LIFFE acts as a counterparty, also has a set margin price which allows traders to better anticipate the risks involved in the fluctuations of cocoa prices. It originates from the genus Theobroma, a group of small trees found in the Amazon basin and other tropical areas of South and Central America.

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Cocoa, when combined with spices, served as a luxury drink in the Aztec empire. It was brought to Spain in the 16th century by the Conquistadors, and for nearly a century, chocolate — made from cocoa, sugar, cinnamon and vanilla — became an exclusive drink of the Spanish Royal Court, until it eventually achieved a wider popularity in cocoa houses of major European cities.

As the popularity of the chocolate drink grew, chocolate houses started appearing alongside coffee houses throughout the 17th and 18th century. InConrad J. Van Houten, a Dutch manufacture, began the landmark transformation of cocoa from a beverage to a solid form.

Van Houten found that a liquid cocoa butter called liquor could be pressed out of ground cocoa beans and then used as a base to make chocolate candy. The mixture of cocoa mass, sugar, and cocoa butter and also milk, in the case of milk chocolate allowed the manufacture of chocolate.

Van Houten also invented alkalisation, which not only neutralized unpleasant tasting acids, but also improved colour and solubility. Cocoa was reported to have been used as a form of currency until the s. Daniel Peters, a Swiss candy maker, invented milk chocolate 40 years later, and further increased the attraction for chocolate and the demand for cocoa beans.

The use of cocoa in the food manufacturing business today is widespread. Cocoa butter is utilized in the production of chocolate and cosmetics; cocoa powder is used for baking, beverages, and coatings; and shell and residue for animal feedstuffs Sucden, ; Infinity Trading Corporation, Production levels for cocoa are largely dependent on the cultivation policies of the various producing countries, as well as climatic and weather conditions, and prices.

A cocoa tree takes 5 to 7 years to reach its full production capacity from planting. Cocoa products are made from the beans, or kernels of the cocoa fruit.

Financial Derivatives

There are approximately 40 seeds, or beans, to each fruit, and the beans grow all year round, with thousands of small flowers, of which only 20 to 40 actually develop into fruit.

Once the cocoa beans are harvested, they are fermented and dried, and then cleaned, blended, and fragmented at the factory. A winnowing machine is then used to remove the shells from the beans leaving cocoa nibs, which are alkalised before, during, or after roasting.

Once the fat is pressed out, it leaves cocoa butter and cocoa powder Sucden, Consumption of cocoa is generally measured in terms of grindings.

Global consumption is reported to be approaching 3 million tones. Cocoa is consumed predominantly in countries of relative high income. The US is the leading importer of cocoa products such as cocoa butter, liquor, and powder today.

Cocoa beans are traded in tonnes, among producers, exporters, importers, trade houses, processors, and manufacturers. The International Cocoa Organization ICCO was set up to encourage price stability in a historically and potentially volatile marketplace. During the s, a bugger stock management scheme was set up to purchase cocoa in order to stem the rate of price decline, but was unfortunately unsuccessful and lead to the liquidation of the ICCO Infinity Trading Corporation, ; Sucden, Introduction of the Futures Market of Cocoa Countries which produce cocoa for export work through a chain of local traders and central sales organizations.

In these countries, traders, buyers, brokers and agents carry out their trade and together form the marketing parties which agree on the quality of the cocoa for trading, the time and place of delivery, and the quantities.

Since supply of cocoa tends to be extremely vulnerable due to climatic changes, the price of cocoa also tends to rise or fall during the year because of these climatic changes. Cocoa buyers — which is the cocoa-processing industry and its clients — naturally want to cover themselves against these price fluctuations.

The futures market in cocoa owes its very existence to these uncertainties. The world price of cocoa is determined by what is called the futures market of cocoa. Without the need of conducting personal or face-to-face meetings, buyers and sellers of cocoa are able to conclude contracts about the future deliveries of cocoa beans on the futures market.

At the time of negotiation of these contracts, the cocoa beans which are the subject matter of the contracts have usually not even begun to grow. In other words, the subject matter of the contracts are not yet existing cocoa, but this actually provides for an opportunity for a lively and exciting global trade on cocoa.

The clearinghouse also serves to settle the differences in price European Cocoa Association, There are only two places where cocoa futures contracts can be exchanged: The most important futures market thus for cocoa trading are in London and New York.

Price trends however can be closely followed from anywhere in the world European Cocoa Association, The two contracts demonstrate a strong correlation but still offer arbitrage possibilities to parties to a sales contract for cocoa.

The contract in London is traded in pounds sterling per metric tonne of fermented cocoa, in bags or in bulk from Mayand from a number of origins, with discounts applied to some.In essence, any underlying asset that is subject to market volatility and price fluctuations is a good candidate for being the basis for a financial derivative.

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