kindly to reply my tow friendsQ1. All derivatives are based on the random performance of something. Identify and discuss this word something. [Word limit: 150] Kindly comment on my two friend post 2/1 Top of Form The word “something” in the statement refers to the underlying asset or reference variable on which a derivative contract is based. A derivative is a financial instrument whose value is derived from the performance of an underlying asset, index, or reference rate. The underlying asset could be anything that has a measurable value, such as stocks, bonds, commodities, currencies, interest rates, or market indices. Derivatives allow investors to gain exposure to the underlying asset or to hedge against potential risks associated with the asset’s price movements. The underlying asset is not necessarily random, but its performance can be uncertain or unpredictable, which creates the possibility for investors to gain or lose money through derivative transactions. For example, the price of a stock may fluctuate due to various factors, such as changes in the company’s earnings, market sentiment, or geopolitical events, which can make it difficult for investors to predict its future performance. Derivatives also allow investors to create synthetic exposure to an underlying asset without actually owning it, which can be useful for managing investment portfolios, hedging risks, or speculating on future price movements. The value of a derivative is based on the price movements of the underlying asset, which can be influenced by various factors, including supply and demand, market sentiment, fundamental factors, and macroeconomic conditions. In summary, the “something” in the statement refers to the underlying asset or reference variable on which a derivative contract is based, and its performance can be uncertain or unpredictable, which creates the possibility for investors to gain or lose money through derivative transactions. Bottom of Form 2/2 Because each derivative is reliant on the unknowable outcomes of something else, the term “derivative” accurately describes the nature of these financial instruments. The success of another asset is directly proportional to how much value the derivative will have. When discussing this “something else,” it is customary practice to refer to it as the underlying asset. Yet, the word “underlying asset” could lead one to the wrong conclusion. A few examples of underlying assets include commodities, currencies, commodities, and stocks and bonds. On the other hand, the underlying “asset” can be something completely random, like the state of the weather. It is possible that the instrument in question is a futures contract, an option, or some other sort of derivative.
