What the difference between transform the payoff and passes on the payoff?
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Firstly of all Derivative derive the value from the underlying (stock, bonds,interest rate) whereas mutual funds has also underlying as stock so what is the difference between transform and payoff
When you purchase a mutual fund its performance totally depend upon the performance of the underlying if underlying performance is decent say 10% then the performance of the mutual fund will also be on an average be same and return on the mutual funds are given after deducting various expense and passes the payoff
Whereas Derivative transform the payoff because in mutual funds you get the return on an average 10% before various expenses whereas in Derivative you will get more than 10% or less than 10% because it depends upon various factor such as risk free rate and many more factor
In Derivative the risk did not change but the party who is bearing the risk change