Derivatives are financial instruments whose value is derived from the value of something else. They generally take the form of contracts under which the parties agree to payments between them based upon the value of an underlying asset or other data at a particular point in time. The main types of derivatives are futures forwards, options, and swaps.
There has been much controversy recently over derivatives, mostly because politicians, senior executives, regulators and even portfolio managers have limited knowledge of these complex products. The Financial Pipeline has introduced its derivatives page to educate our visitors and other investors on these complex instruments
The main use of derivatives is to reduce risk for one party while offering the potential for a high return (at increased risk) to another. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commoditiesequities , stock, bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) â€” see inflation derivatives â€” or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the payoffs
Stock futures are contracts where the buyer, or long, takes on the obligation to buy on the contract maturity date, and the seller, or short takes on the obligation to sell. Stock index futures are generally not delivered in the usual manner, but by cash settlement.
Why use derivatives and not just cash instruments? Derivatives exist to solve specific positioning, accounting and regulatory problems. These reasons may not be immediately clear to you but they will be after you read all of the derivatives articles on this web site
A Derivative Includes?
Security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security.
A contract which derives its value from the prices, or index of prices, of underlying securities.