Description of the Derivatives Markets-Cont’d There is a close relationship between the prices of derivatives contracts and the prices of the underlying assets they represent, and that the value of a derivative, and hence its price, varies as the price in the cash market fluctuates. However, in practice, derivatives seldom lead to the exchange of the underlying product. Instead, contracts are closed out or allowed to lapse before the delivery date arrives. Derivatives allow portfolio managers to change the risk profile of their portfolios at a very low cost. Without derivatives, portfolio managers have to conduct transactions in the underlying cash markets (i.e., money, bond, or equity markets) at a higher cost, including the costly transfer of securities.
