a financial instrument whose value is derived from the value of an underlying asset is called a.
a financial instrument whose value is derived from the value of an underlying asset is called a?
a
from the economic point of view, financial derivatives are cash flows, that are conditioned stochastically and discounted to present value. the market risk inherent in the underlying asset is attached to the financial derivative through contractual agreements and hence can be traded separately. the underlying asset does not have to be acquired. derivatives therefore allow the breakup of ownership and participation in the market value of an asset. this also provides a considerable amount of freedom regarding the contract design. that contractual freedom allows derivative designers to modify the participation in the performance of the underlying asset almost arbitrarily. thus, the participation in the market value of the underlying can be effectively weaker, stronger (leverage effect), or implemented as inverse. hence, specifically the market price risk of the underlying asset can be controlled in almost every situation.
derivative (finance)
conversely, any economic quantity that is negatively correlated with the overall state of the economy is said to be countercyclical. that is, quantities that tend to increase when the overall economy is slowing down are classified as 'countercyclical'. unemployment is an example of a countercyclical variable. similarly, business failures and stock market prices tend to be countercyclical. in finance, an asset that tends to do well while the economy as a whole is doing poorly is referred to as countercyclical, and could be for example a business or a financial instrument whose value is derived from sales of an inferior good.
procyclical and countercyclical variables