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CONCEPTS OF DERIVATIVES, BASIS FOR COMPARISON, Market maker, Physical…

- - - - Seller: producer, supplier or processor
      - Buyer: refiners, consumers or users
- - - - The 1st organized future trading took place in Japan in the 18th Century
        
        Tickers were issued for entitlement of rice crops in the field. The trading was organized because merchants would buy these tickers based on their future needs of rice.
        
        The same elements of derivative trading were created in the USA in the 19th century.
        
        It started with the formation of the Chicago Board of Trade (CBOT). CBOT believed to be the first fully regulated future market with the presence of broker.
        
        The Malaysian derivative exchange (BMDB), follows the model of CBOT, which recognizes the importance of price risk management.
        
        The existence of this organized future market were reinforced by the introduction of the date of delivery, grades and quantity of rice (underlying commodity). The formation of clearing house to act as guarantor by issuing the tickets.
      - during this period, merchants sold forward their goods well because these goods arrived at their designated ports.
      - Price were settled at the time the agreement was reached. Thus, both buyers and sellers are protected against adverse price movements.
- - - - The ability of derivative markets to reveal information about future cash market prices and represents the consensus of participants today about the prices of physical instrument in the future.
        
        Investor can easily discover the likely price in the future by referring the derivatives price today.
        
        It will also enable investors to make better investment and consumption decisions about the exposure in physical markets
    - - Participants in the futures market use derivatives contracts as a substitute for the cash market transaction.
        
        Price risks refer to the adverse price movements in the future that will affects their exposure in the cash market.