Difference between revisions of "Derivatives"

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Derivatives are financial instruments whose [[performance]] is linked to a specific [[commodity]], [[security]], [[index]], [[financial instrument]] or the occurrence or magnitude of an event.<ref>{{cite web|url=http://www.financialpolicy.org/dscotcstructure.pdf |name=The Structure of OTC Derivatives Markets|org=The Financier|date=February 24, 2008}}</ref>   
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Derivatives are financial instruments whose performance is linked to a specific [[commodity]], [[security]], [[index]], financial instrument or the occurrence or magnitude of an event.<ref>{{cite web|url=http://www.financialpolicy.org/dscotcstructure.pdf |name=The Structure of OTC Derivatives Markets|org=The Financier|date=February 24, 2008}}</ref>   
Typically, derivatives are used to transfer [[risk]] or negotiate the future [[sale]] or [[delivery]] of an [[investment]]. Derivative instruments come in four basic forms: [[forward contracts]], [[futures contract]]s, [[swaps]] and [[option]]s.  
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Typically, derivatives are used to transfer [[risk]] or negotiate the future sale or [[delivery]] of an [[investment]]. Derivative instruments come in four basic forms: [[forward contracts]], [[futures contract]]s, [[swaps]] and [[option]]s.  
  
As an example, consider soybean farmers wishing to [[contract]] to sell their harvest at a future date to eliminate the risk of a change in [[price]]s by that date. Such [[transaction]]s would take place through a [[forward]] or [[futures]] market. This market is the "derivatives market," and the prices on this market would be driven by the [[spot market]] price of soybeans which is the "[[underlying]]." The terms "[[contract]]s" or "products" are often applied to denote the specific traded instrument.
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As an example, consider soybean farmers wishing to [[contract]] to sell their harvest at a future date to eliminate the risk of a change in [[price]]s by that date. Such transactions would take place through a [[forward]] or [[futures]] market. This market is the "derivatives market," and the prices on this market would be driven by the [[spot market]] price of soybeans which is the "underlying." The terms "[[contract]]s" or "products" are often applied to denote the specific traded instrument.
  
 
There are two types of derivatives markets, [[exchange-traded]] derivatives and [[over-the-counter]] (OTC) derivatives. OTC derivatives are privately negotiated deals between two parties which do not go through an [[exchange]] or other intermediary. [[Swaps]], forward rate agreements, and [[exotic option]]s are usually traded in this way. The OTC derivatives market is enormous.
 
There are two types of derivatives markets, [[exchange-traded]] derivatives and [[over-the-counter]] (OTC) derivatives. OTC derivatives are privately negotiated deals between two parties which do not go through an [[exchange]] or other intermediary. [[Swaps]], forward rate agreements, and [[exotic option]]s are usually traded in this way. The OTC derivatives market is enormous.
  
[[Exchange]]-traded derivatives include futures and options contracts. The exchange acts as an intermediary for both [[side]]s and [[guarantee]]s the trade. The largest derivatives exchanges by number of transactions are the [[Korea Exchange]], [[Eurex]], and [[CME Group]].  
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[[Exchange]]-traded derivatives include futures and options contracts. The exchange acts as an intermediary for both sides and guarantees the trade. The largest derivatives exchanges by number of transactions are the [[Korea Exchange]], [[Eurex]], and [[CME Group]].  
  
 
== History ==
 
== History ==
In the second half of 2008, the derivatives [[market]] shrank for the first time in its history as the [[global financial crisis]] curbed [[trading]], the [[Bank for International Settlements]] said in a report. The amount of [[outstanding contracts]] linked to [[bond]]s, [[currencies]], [[commodities]], [[stock]]s and [[interest rate]]s fell 13.4 percent to $592 trillion, the Basel, Switzerland-based [[bank]] said. That was the first decline in 10 years of compiling the data. The amount of [[credit-default swaps]] protecting [[investor]]s against [[loss]]es on [[bond]]s and [[loan]]s fell 27 percent to cover a [[notional]] $41.9 trillion of [[debt]].<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601102&sid=aH8SyaUL.9H0|name=Derivatives Market Declines for First Time on Record|org=Bloomberg|date=May 20, 2009}}</ref>  
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In the second half of 2008, the derivatives [[market]] shrank for the first time in its history as the [[global financial crisis]] curbed [[trading]], the [[Bank for International Settlements]] said in a report. The amount of outstanding contracts linked to [[bond]]s, [[currencies]], [[commodities]], [[stock]]s and [[interest rate]]s fell 13.4 percent to $592 trillion, the Basel, Switzerland-based [[bank]] said. That was the first decline in 10 years of compiling the data. The amount of [[credit-default swaps]] protecting [[investor]]s against losses on [[bond]]s and [[loan]]s fell 27 percent to cover a [[notional]] $41.9 trillion of [[debt]].<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601102&sid=aH8SyaUL.9H0|name=Derivatives Market Declines for First Time on Record|org=Bloomberg|date=May 20, 2009}}</ref>
  
 
== Types of Derivatives Products ==
 
== Types of Derivatives Products ==
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Derivatives products cover all major [[asset]] classes. Derivatives are offered in [[commodities]], currencies, [[interest rate]]s, [[equities]] and [[equity index]]es, precious and industrial metals, energy products, real estate, weather products and others.
 
Derivatives products cover all major [[asset]] classes. Derivatives are offered in [[commodities]], currencies, [[interest rate]]s, [[equities]] and [[equity index]]es, precious and industrial metals, energy products, real estate, weather products and others.
 
   
 
   

Latest revision as of 14:45, 15 May 2019

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Derivatives are financial instruments whose performance is linked to a specific commodity, security, index, financial instrument or the occurrence or magnitude of an event.[1] Typically, derivatives are used to transfer risk or negotiate the future sale or delivery of an investment. Derivative instruments come in four basic forms: forward contracts, futures contracts, swaps and options.

As an example, consider soybean farmers wishing to contract to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such transactions would take place through a forward or futures market. This market is the "derivatives market," and the prices on this market would be driven by the spot market price of soybeans which is the "underlying." The terms "contracts" or "products" are often applied to denote the specific traded instrument.

There are two types of derivatives markets, exchange-traded derivatives and over-the-counter (OTC) derivatives. OTC derivatives are privately negotiated deals between two parties which do not go through an exchange or other intermediary. Swaps, forward rate agreements, and exotic options are usually traded in this way. The OTC derivatives market is enormous.

Exchange-traded derivatives include futures and options contracts. The exchange acts as an intermediary for both sides and guarantees the trade. The largest derivatives exchanges by number of transactions are the Korea Exchange, Eurex, and CME Group.

History

In the second half of 2008, the derivatives market shrank for the first time in its history as the global financial crisis curbed trading, the Bank for International Settlements said in a report. The amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates fell 13.4 percent to $592 trillion, the Basel, Switzerland-based bank said. That was the first decline in 10 years of compiling the data. The amount of credit-default swaps protecting investors against losses on bonds and loans fell 27 percent to cover a notional $41.9 trillion of debt.[2]

Types of Derivatives Products

Derivatives products cover all major asset classes. Derivatives are offered in commodities, currencies, interest rates, equities and equity indexes, precious and industrial metals, energy products, real estate, weather products and others.

Derivatives Trading Around the World

Derivatives Regulation

In the United States, futures and options are regulated by the Commodity Futures Trading Commission (CFTC).[3] In the UK, all financial markets, including derivatives, are regulated by the Financial Services Authority (FSA).[4]

Leverage, Risk and Reward

References

  1. The Structure of OTC Derivatives Markets. The Financier.
  2. Derivatives Market Declines for First Time on Record. Bloomberg.
  3. About The CFTC. CFTC.
  4. What We Do. FSA.