Distinguish between the following: Derivatives management and Portfolio management.

Distinction between Derivatives Management and Portfolio Management S.No. Derivatives Management Portfolio Management 1 Derivatives are contracts which give the holder the right to buy or sell an underlying asset and their values are derived from the value of underlying assets. They are used in hedging and could also be used in speculative trades or arbitrage. A portfolio consists of securities. Each of these securities has its own value. Portfolio management deals with the management of this bucket of securities. 2 Derivatives bear leverage as the margins are very low. Accordingly, a slight change in the value of an underlying asset can have a disproportionate effect on the value and risk of the derivative. The value of a portfolio is directly dependent on the value of components of the portfolio. However, as a portfolio is diversified, it is vulnerable to market risk. Diversification rules out extraordinary losses and gains. 3 A derivative instrument does not give ownership of any asset and therefore will not earn any interest or dividend. It is only a promise to buy or sell an underlying asset. A component of a portfolio is always owned directly by the entity. 4 Examples of derivatives are options, put and call, forward contracts, futures and swaps. Components of a portfolio are assets themselves.