Question

Give some examples in business when you would want to find the instantaneous rate of change rather than the average rate of change.

Discussion on Derivatives

Answer 1

Instantaneous rate of change refers to the change that is not over a long period of time, it tells that rate of change that is instant.

Whereas average rate of change is for longer time than instantaneous rate of change. In business where instant or current rate effects values of transactions, instantaneous rates are used so as to avoid losses or incur profit.

For example: In stock market (short term), as there are frequent purchases and sales of shares and securities in the market and investors are ready to deal to earn profit from speculations. Rate changes at a fast pace and therefore instantaneous rate of change is required.

In foreign exchange markets, whether a deal will be profitable or not depends upon the exchange rate. In derivatives, forwards,options and other market instruments; profit and loss depends upon rate of change and as these speculations results in profit or loss, there is a need for instantaneous rate of change.