Derivatives: Forwards vs Futures

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  Before understanding what is derivative, let’s learn what is underlying asset. Underlying asset: Underlying asset can be real asset such as commodities, gold etc or financial assets such as index, interest rates etc. Derivatives: ·         These are financial instruments who value depend upon or is derived from some underlying asset. ·         A derivative does not have its own physical existence, it emerges out of contract between the buyer and seller of derivative instrument. ·         Its value depends upon the value of underlying asset. Hence returns from derivative instruments are linked to returns from underlying assets. ·         The most common underlying assets are stocks, bonds, commodities, market indices and currencies. ·         Derivatives are mainly used to control risks. They can be used to reduce risks (a process known as hedging) or to increase risks in order to enhance returns (speculation)   Classification of Derivatives: ·         Broadly we c

Do you know the difference between Excess and Deductibles ?

Excess vs Deductibles:

Let's have a look at little bit of background

  • The main motive behind both of these is to safeguard the insurance company from frequent or frivolous claims. People after purchasing the insurance policy become careless because they know that in case of any incident they will be paid off from the insurance company so to avoid this excess or deductible are used.
Now,the main difference are as follows:
  • An excess is an amount a policyholder must bear before the liability passes to the insurer (subject to the sum insured)
  • Deductible is an amount withheld by the insurer from the claim amount paid to the policyholder.

Let's see 2 examples to understand in an easy way.
Scenario 1
  • A policy has a sum assured of $1000 and an excess of $100
  • Now if the loss to insured is $500, then insurer will pay 500 -100 = $400
  • If loss to the insured is $1500, then insurer will pay $1000 (as it is the max amount that insurer can pay)

Scenario 2
  • A policy has a sum assured of $1000 and deductible of $100
  • Now if the loss to insured is $500, then insurer will pay 500 -100 = $400
  • If loss to the insured is $1500, then insurer will pay 1000 - 100 = $900 (i.e. sum assured less deductible)
Deductible reduces the maximum payout but excess does not 

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