Introduction

Derivatives are defined as substances that are created from others as defined in chemistry. Similarly, financial derivatives are instruments that allow value exchanges based on pre-existing acts. Usually, the owner of the real stock enters into an agreement with someone who will be willing to buy that stock at an established price at some time in the future. The latter is the most common form of arrangement. However, other agreements in the market do exist. The purpose of a financial derivative is to give a stock owner or purchaser leverage (control of a large stock using minimal investment). Leverage is not only applicable in the field of financial derivatives as it is common to use in other financial sectors such as insurance, real estate etc. However, there is a flipside to this argument, sometimes, the stated amount chosen for the financial derivative may be inaccurate i.e. the future may work against the stock owner. In such scenarios, it would have been advisable to deal with direct payments rather than through the use of derivatives. (Thomas et al, 2000)