Skip to main content

Explaining derivatives in local Singapore terms

A friend was asking what are derivatives and what does it have to do with trading.

I explained in local terms and it is something that I feel should be repeated on the blog.

Please note that the supermarkets mentioned here are only used for example sake and they may or may not be involved in derivatives trading. 

Say it takes a year to grow rice. A farmer starts planting rice in January 2011. The price of rice is SGD1 per kg in January 2011. However, the farmer is worried that by January 2012, the price of rice will drop to SGD0.90 per kg. NTUC is worried that the price of rice might increase to SGD1.20 per kg in January 2012. So in January 2011, the rice farmer agree to sell the rice to NTUC at SGD1.10 per kg in January 2012.

When Jan 2012 comes, the price of rice is SGD0.80 per kg, the farmer is protected as he can sell the rice to NTUC at SGD1.10 per kg. The farmer gains, but NTUC loses. The opposite scenario is at Jan 2012, the price of rice is at SGD1.30, NTUC saves, but the farmer loses possible additional income of SGD0.20 per kg.

From Jan 2011 to Dec 2011, NTUC can sell this contract to in the derivative market. For example, by Nov 2011, Giant has news that price of rice will go for SGD2.00 per kg by Jan 2012. Giant can offer to buy that contract from NTUC at a higher price say SGD1.50 per kg. NTUC has found a cheaper source for rice so agrees to sell the contract to Giant. When Jan 2012 comes, and price of rice is SGD2.00 per kg, Giant gets rice at SGD1.10 per kg from the farmer.

Extend this the currency, bond and oil markets.


jaylen watkins said…
Thank for explaining derivatives to your friend and to all of us thank for this article post.

Resume Format

Popular posts from this blog

Why is Ramly Burger banned in Singapore?

Yahoo Singapore ran an article of the Ramly Burger by highlighting that it is ban in Singapore.

Yet, the writer from Makansutra failed to address the most important issue of why the Ramly meat patty is banned in Singapore.

A search online easily did highlight that the famous Malaysian meat patty is banned by the AVA but didn't go into details.

Wrote Arlina Arshad for The Straits Times in January 2004,

"But the importing of beef and beef products from Malaysia is not permitted, said theAgri-Food and Veterinary Authority (AVA).

Selling and supplying them without a permit is also an offence, and offenders can befined as much as $50,000 or jailed two years, or both, said the AVA."

In May of the same year, another article highlighted that a man was even charged in court for "smuggling" the Ramly burger in 2004.

"The AVA said that meat products processed in Malaysian food factories which it had notapproved were banned here.Suzali was yesterday jailed for four month…

Social Media 101: How To Be The Most Hated Person In Singapore Instantly

It is amazing how we are quick to forget that a single wrong comment on social media can make one the most hated person in Singapore.

Back in 2012, we had Amy Cheong. Her comments on Facebook about a Malay wedding under her HDB void deck resulted in an online CSI that cost her her job.

Fast forward to 2017 and we have Thomas Chua Poh Heng and whose name will forever live in Internet infamy.

Thomas reposted a video of the funeral of a Traffic Policeman who died while on duty. Thomas then commented that his death was well deserve as Thomas was once given a traffic ticket by the same Traffic Policeman.

Even the Home Minister for Singapore, who is responsible for the Police Force, was offended by Thomas' statement.

The screenshot showed that post was marked global by the Globe image next to the Singapore tag which could hint that this post was meant for all to see. As such, the argument of a "private"post does not hold any weight here.

Just as expected, after this post was s…

Google Post Now Available for Google My Business

Google Post, which was previously available for the US Elections in 2016, is now available for all small business who have registered their business with Google My Business.

Google Post allow you to put small snippets about a promotion, event, or show case new products,etc.

Take my company's Google My Business layout above. If you Google "NetGain Systems", you will see the NetGain Systems Pte Lte Google Business Profile. Below the profile is the Google Post of our free IT monitoring software.

According to Search Engine Land,

Google says this give businesses the ability to:

Share daily specials or current promotions that encourage new and existing customers to take advantage of your offers.
Promote events and tell customers about upcoming happenings at your location.
Showcase your top products and highlight new arrivals.
Choose one of the available options to connect with your customers directly from your Google listing: give them a one-click path to make a reservation, sign …