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The Complex World of Derivatives

The Complex World of Derivatives: How Hedge Funds Use Futures, Options, and Swaps to Maximize Returns

Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. In other words, they are contracts between two parties that specify the conditions under which payments are to be made between them based on the value of the underlying asset that each party owns. Options, futures, swaps, and forward contracts are examples of derivatives that are used to control risk. They take the risk of speculating on future market movements in order to maximize profits on investments. 

Hedge funds use derivatives extensively to gain wide exposure to various assets, hedge against potential losses, and speculate on market movements. However, the use of derivatives also comes with significant risks, and their complexity can make them difficult to understand for the average investor.

In this article, we will explore the world of derivatives and how hedge funds use them to achieve their investment objectives.

What are Derivatives? 

What are Derivatives? 


Understanding derivatives is not so complicated because derivatives have evolved into an essential component of modern financial markets, allowing investors to minimize risk while maximizing rewards. Because of the potential for big profits and the flexibility they provide, hedge funds, in particular, have become significant consumers of derivatives. Derivatives, on the other hand, may be extremely complicated products that need a thorough grasp of market dynamics as well as sophisticated trading tactics. 

In this post, we will look at futures, options, and swap derivatives and how hedge funds utilize them to navigate the complicated financial landscape. We will also look at the benefits and hazards of these instruments and their use in financial markets. 

Use Of Derivatives  

Use Of Derivatives


The purpose of derivatives is to manage financial risk, speculate on price movements, and provide market liquidity. There are several types of derivatives, such as futures contracts, options contracts, and swaps. Because of their complexity, they are not used for simple selling and buying investment. They are used in the following ways to help out the investors.

  • Hedging a Financial Position: Investors can use derivatives in order to protect themselves from potential losses in their investment portfolio. If they are concerned about the direction in which the value of an asset will go in the future.
  • Predictions on an Asset’s Price: Investors who believe that an asset’s value is likely to change significantly, they will be able to use derivatives to make bets on whether it would gain or lose value in the coming future.
  • Investment Portfolio Diversification: Investment portfolios can be diversified with the help of different types of derivatives. An investor can take advantage of futures contracts in several ways, including investing in a basket of commodities.
  • Improve the Efficiency of Funds: It is important to note that the majority of derivatives are margin-powered, which means that you can enter into them with a very small amount to put up. This can also increase returns compared to putting all of your money in one place. 

Regardless of their wide range of possibilities, derivatives are associated with a great deal of risk that must be carefully managed. It’s important for investors to have a solid understanding of the underlying assets and market dynamics before using any kind of derivatives in their investment strategies.

There are some risks involved in using derivatives.

Risk Involved in Using Derivatives 

Risk Involved in Using Derivatives


The derivative can sometimes be risky, and the following are the associated risks. 

  • Counterparty Danger: Derivatives have a significant risk of the opposite party in an agreement defaulting, especially when traded over the counter. Derivatives have no inherent value and are ultimately worth only the trustworthiness of the individuals or organizations who consent to them.
  • Changing Conditions: Investing in derivatives that are contractually bound to preset prices might lead to wealth or misery. Depending on the margin you agreed to, you may have to honor big losses if you agree to futures, forwards, or swaps.
  • Complex: Investing in derivatives can get complicated quickly, particularly for investors unfamiliar with the investment types. Furthermore, they require a level of industry knowledge and active management that may not appeal to investors used to traditional hands-off investing.

Various derivatives serve a variety of purposes, and each plays an important role in some way. In the next section, we’ll discuss derivatives and their types. 

Types Of Derivatives 

Types Of Derivatives 


A derivative is typically divided into four types: a futures contract, a forward contract, an options contract, and a swap contract.

We’ll examine how derivatives work today and how they can be used in a variety of ways. 

  • Futures Contract: A futures contract is an agreement between two parties to purchase and sell an item at a certain price on a future date. Since futures contracts commit parties to a certain price, they can be used to mitigate the risk that the price of an item rises or decreases, forcing someone to sell assets at a huge loss or acquire them at a significant markup. On the other hand, futures contracts lock inappropriate pricing for both parties based on their current knowledge. 
  • Forwards Contracts: The forward contract is similar to the futures contract but is not traded on an exchange like the futures contract. These contracts only trade over the counter. Buyers and sellers can customize a forward contract’s terms, size, and settlement process. Due to their OTC nature, forward contracts carry a higher degree of counterparty risk for both parties.
  • Options Contracts: Like a futures contract, an options contract is an agreement between two parties to buy or sell an asset at a specified price at a future date. The main difference between options and futures is that the buyer is not obligated to follow through with their agreement. Unlike futures, it is only an opportunity.
  • Swaps Contracts: One of the most popular types of derivatives is the swap, which allows one cash flow to be exchanged for another. A trader, for example, may utilize an interest rate swap to convert a variable interest rate loan to a fixed interest rate loan or vice versa.

Several forms of derivatives serve diverse functions for investors, and this diversification sometimes results in an advantage or disadvantage. 

Advantages and Disadvantages of Using a Derivatives


Advantages and Disadvantages of Using a Derivatives 


As in the whole blog, we have discussed how useful derivatives are, but we can’t forget that they are only for the risk takers. There is no doubt that they are useful tools for investors, but they are risk providers too.

So let’s bring out the advantages and disadvantages of derivatives. 


  • Derivatives can work in unfavorable conditions, too, and lower exposure to risk by purchasing assets in a different position to minimize loss. 
  • Derivatives help investors to get the hang of the new market and its new strategies and drawbacks. 
  • Derivatives help us in growing with the help of leverage. 


  • Because the derivative has no intrinsic value (it is only worth what the underlying asset is worth), it is sensitive to market emotion and risk.
  • Derivatives are often leveraged instruments, and applying leverage has two consequences. While it might enhance the pace of return, it also accelerates the accumulation of losses.
  • Derivatives continue to change with the amount of time to expiration. 

Derivatives offer both advantages and disadvantages, but if you are well prepared for the coming situations, then derivatives can do wonders in maximizing your returns. 

Bottom Line 


The article delves into the complicated world of derivatives and how hedge funds employ futures, options, and swaps to maximize returns. It begins with an overview of derivatives, their several sorts, and how they function. Then the article discusses the usage of derivatives and how hedge funds employ them to achieve their investing goals. The pros and hazards of derivatives are also thoroughly examined. Before employing derivatives in an investing plan, one should need to have a strong grasp of the ongoing  market dynamics.

While derivatives may be complex and dangerous, they have become a key component of contemporary financial markets, allowing investors to avoid risk while increasing gains. Because of the possibility for large returns and the flexibility they enable, hedge funds in particular have become prominent users of derivatives.

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Ashish Verma

Ashish Verma is the founder and CTO of Secvolt, with close to 10 years of experience in the IT industry. He has been the technical backbone of the company and has worked tirelessly to make the technical infrastructure robust. He is a passionate entrepreneur who generates solutions that have the potential to bring change.

In order to ease the client’s interaction with Secvolt, he has strived to develop the business’s technological foundation and establish a user-friendly platform. Ashish has also contributed substantially to smoothening the company’s administration and ensuring that there are no lacunae in the broad structure of the organization. 

Early Years

Coming from a middle-class family, he was aware of the problems that people faced while using technology. He sought to create something that was simple to use yet had a powerful effect. As he studied computer science, he became eager to offer a solution to real issues. He began his professional career at Amdocs, where he gained expertise in client management while catering to more than 20 clients. Later, he moved to Citicorp, where he had exposure to the investment industry. His time at Amdocs and Citi enabled him to produce high-standard, efficient, and scalable technical infrastructure.

He left corporate jobs for his startup because he was passionate about working on the concept of a smart city platform. He expanded the concept internationally and even collaborated with Global Dignity-Kuwait. Things didn’t work out for him the first time. He states, “My failures didn’t stop me from experimenting and trying new things.” He rose from the ashes like a phoenix and founded FewerClicks, an End to End IT solution company.

He worked on the creation of Solster Finance, a decentralized financial platform based on the Solana blockchain. He created this platform single-handedly which has helped the team raise a $1M investment and a revenue of more than $5M within 6 months of launching. 

He has previously worked on many blockchain technologies and cryptocurrency ventures, which include Decentralized Finance Applications (Defi), Decentralized Applications (Dapps), File Contracts (SIA, record-keeper), Smart Contracts (rust, solidity), and NFT Development. His experience and effective communication have helped many team members understand Secvolt effectively and the underlying technology it is powered by.

He possesses the ideal combination of strategic thinking and excellent business insight. He is responsible for formulating technical aspects of the company’s strategy to guarantee alignment with business objectives. With his drive to experiment with new technologies, he has helped Secvolt achieve a competitive edge. Being in charge, Ashish never holds back in encouraging the different departments to make profitable use of technology, helping to grow as an unstoppable team at Secvolt!

Hanif Shaikh

Hanif Shaikh is the founder and CMO of Secvolt, with over 8 years of experience in the industry. He plays a crucial role when it comes to the growth of Secvolt. Since the beginning, he has acted as a mentor for each and every employee of the company, and he makes an effort to be accessible to his staff anytime they need him. 

Hanif first entered the Blockchain and Crypto world in 2016, and nothing has stopped him since. He views blockchain as a transparent platform that provides authority and accountability back to the people. He consistently believes that “overcommunication is better than miscommunication.” He has lived by this motto with his staff, clients, and networks.

Early Years

Hailing from Gujrat, a state in India, he is following his dream to contribute to making this world a better place. In the process, he has struggled, made some mistakes, and learned lessons from those mistakes to achieve success in life. His entrepreneurial attitude dates back to his childhood when he learned from his father’s business and aspired to have it all. He came from a humble background and had ambitions to succeed in life.

He has developed two successful businesses from scratch, and in the process, he has inspired young people to start their own businesses. He was an integral part of the Quora Mumbai Meetups and helped it become a great success in a short period of time. Later, he began organizing meetups to raise awareness about blockchain, cryptocurrencies, and their applications. He also shared his knowledge of ICOs, highlighted reputable ICOs, and established a small cryptocurrency community on WhatsApp groups.

He chose to go on a Blockchain Tour in India in 2019 and met some fascinating people. Throughout his journey, he has been able to build an extensive and robust network that has aided Secvolt’s growth. Because of his expertise and understanding of the Crypto Industry, he has been featured on several news channels and has advised the youth on the subject.

He is in charge of the company’s marketing operations and is responsible for developing its marketing strategy and vision. He oversees a group of passionate marketing professionals and plans promotional strategies with the goal of making  Secvolt a global brand. 

He is a perfect blend of a practical attitude and innovative business acumen. He believes in the ability of individuals to perform exceptionally well when given an environment to experiment and explore their passions; a culture that he has built at Secvolt.

Divakar Choudhary

Divakar Choudhary is the founder and CEO of Secvolt who has been trading for more than six years now. He started the business in 2018 with the conviction that if anybody could dominate the market, it was him. He poured all of himself into the business and turned Secvolt into a market-beating machine.

Divakar developed the fundamental quant models that perform risk management and capture alpha using his skills from the previous organization and his time spent in the market. In order to make the system effective, he backtested risk mitigation algorithms and worked on them for more than 4 years to produce results.

Early Years

He began his crypto journey in 2013 after getting his first gaming Laptop and melded in with the Blockchain community like sunbeams on the ocean. He created many YouTube channels at the age of 15 and businesses by the time he was 17. Technology has always piqued Divakar’s interest. He endeavored and succeeded at freelancing in his effort to achieve financial independence. However, he soon realized that freelancing would always keep him in the rat race, and the only way out would be to build a machine yielding generational wealth.

Soon, he started trading using his own capital but suffered a loss in the market. He says, “95% of people lose money & the rest 5% make money from the loss of those 95%.” He then began working on an effective technique to be included in this 5% after losing part of his own assets during the early stages of trading. He began evaluating quant strategies using statistical models.

With his methodology, he once produced a 20% ROI in a single month. With the zeal of creating something exceptional, he borrowed money from friends and family and generated decent returns for them using primitive quant models. Month after month, the system’s efficiency and the competence of the man behind it allowed for excellent market returns.

In the beginning, Divakar worked on his laptop for over 18 hours. It took every ounce of his energy as he executed about 530+ deals daily for 4 years to create this company from the ground up. In 2021, he increased his volume by 827%, trading a total of $52 million and hitting a single account.

In his words-

“What does becoming “THAT” GUY mean to you? Who did you need when you were young? Be that person!”

He is a perfect example of someone who followed his passion and made a fortune from it! He dreamt of creating generational wealth as a youngster, envisioned it as an adult, and is now making it a reality with Secvolt!