The Demand and Supply for Derivatives Products

Demand and supply for derivatives is almost similar to the demand and supply of the normal goods. The same law and model holds good for derivative as well. The derivative market is more volatile than the normal goods.

There are four law for basic demand and supply they are,

• If there is a constant increase in demand and the supply side remains constant then the price of the derivative increases along with the quantity traded. 
• If there is a decrease in demand and the supply side remains constant then the price of the derivative remains lower and the quantity also reduces.
• If the supply increases and the demand remain constant then the price lowers however the quantity will be high.
• If the supply decreases and the demand remains the same then the price lowers however the quantity also remains low.

In this model there are basically two types of schedule they are supply schedule and Demand schedule.

Supply schedule usually depicts the number of derivatives the investor is ready to sell at various price. If the price increases the number will also increase. If the price decreases the number will automatically reduce. This can be explained that with increase in price the profit level increases and hence the interest for the producer to sell more at this price whereas at lower price the profit margin reduces and hence the interest of the producer to sell at lower price decreases and hence the volume. The various factors that determine the supply schedule are,

• Purchased cost.
• The price of related derivatives.
• Investor’s expectation about the future price.
• Number of supplier.

Demand schedule usually depicts the number of derivatives the investor is ready to purchase at various price. It is the reverse in case of demand schedule the volume decreases with increase in price. The following factors determine the demand schedule they are,

• Amount to be invested by the investor
• Taste of the investor
• Prices of the related derivatives.
• Expectation
• No of buyers.

The above rule might hold good in most of the cases, however it might not hold good.

There are some exceptions as well in this law.

Question

• What are four basic rules in supply and demand rule?
• What is supply schedule?