112. Derivative

 What is a derivative ? 

Ans - Something that derives it's value from others. 

Example - Curd 

It derives it's value from Milk.

Say 1 kg curd =Rs. 70

        1 ltr milk = Rs. 40 

Why the difference in price??

Dhahi jamaane Mai wakt Lagta hai aur let's say it takes 1.5 litres milk to make 1kg Curd .

Now what happens if the milk price is reduced by 50 percent and curd price is double..

Is it possible??? Well .. yes if the demand and supply of milk and curd is independent of each other then this situation is possible. And we can apply arbitration to check on this disequilibrium.

How ??

See this 

So now milk price is 50 percent less which is 20 rs. And it takes 1.5 ltr to make a curd. So we are buying milk worth 30 rs to make 1 kg curd . The curd price is double so it's inflated to 140 rs now. 

Reasonable price hai for Dahi 40 rs and it's overvalued by 100 rs now. 

Overvalue hai toh sell Karo.. 

Sell Karne ke liye Dahi toh hai Nahi 

Toh kya ?? Jamaalo

30 rs .ke milk khareedo aur jamaalo and dhahi becho thode Kam mai..

Competitors will reduce price to stay in market .

And thus we being price equilibrium using arbitrage.