Financial security
Value derived from underlying Asset(s)
Use
- Hedge position
- Speculate on value movement
- Give leverage to holdings
Commonly based on
- Stocks
- Bonds
- Commodities
- Currencies
- Interest rates
- Market indices
Popular
- Futures contracts
- Agreement between two parties
- Purchase and delivery of asset
- Agreed upon price at future date
- Exchange-traded
- Obligated to buy/sell
- Forwards
- Like a future but not exchange-traded
- OTC
- Greater counter-party risk
- Like a future but not exchange-traded
- Options
- Like a future
- Agreement to buy/sell asset at price on date
- Buyer not obliged to exercise agreement
- Opportunity not obligation
- Two types
- Put
- Sell
- Call
- Buy
- Put
- Like a future
- Swaps
- Exchange one type of cash flow for another
- Swap a variable interest rate for a fixed rate
- Bidirectional payments of difference
- Futures contracts
Can be over-the-counter or on an exchange
- OTC is larger proportion of derivatives market
- Generally have higher possibility of counterparty risk
- Exchange-traded is standardised and more heavily regulated
| Call buyer (Long) | Call seller (Short) |
|---|---|
| Put buyer (Long) | Put seller (Short) |