Derivatives are one of the three main types of financial instruments. The other two are known as equity (stocks) and debt (bonds and mortgages).
In economics, the terms “Derivatives” – derivatives or “Derivatives instruments” – derivative instruments, are a type of contract based on the value of different underlying assets (Underlying assets) such as commodities, only number, interest or stock (valuable paper) – It has no intrinsic value by itself.
Common derivative transactions in the world include: transactions of mortgage debt and credit risk swaps, forward transactions, swap transactions, options trading, ceiling trading ( collar), and structural products.
A few common variations of derivative contracts are:
Forwards: An agreement that is legally binding between a buyer and a seller for the exchange of an asset, where payment takes place at a specific time in the future for a specified amount. today’s predetermined price. Forward contracts can be created for any asset, not just commodities, and can include any terms that the buyer and seller agree to. The futures market is therefore both large and heterogeneous, reflecting the high degree of flexibility and flexibility possible for forward contracts.
A version of a Forward Contract called a Price-later contract reverses the time of the two components described above. A back-price contract is an agreement by a buyer and seller to exchange a spot asset for a later-determined price.
Futures contracts, also known as standard forward contracts, are a materialized version of a conventional forward contract. Like a regular forward contract, a standard forward contract is a contract to buy or sell an asset on or before a future date at a specified price today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearer operating an exchange where the contract can be bought and sold, in when a forward contract is a non-standardized contract written by the parties themselves.
Unlike conventional futures, which can be completely customized, standard forward contracts are standardized in terms of the underlying asset being traded, and the quality and quantity of the underlying asset as well. such as time, place and other details to finalize the contract. Because all the terms and conditions for a standard forward contract except for the price are set in advance, price is the only feature negotiated between buyer and seller.
This high degree of standardization, with price as the only variable, makes standard forward contracts easily tradable. Thus, those who initially buy or sell the standard forward contract and then wish to liquidate it need not find a counterparty but their own from the initial trade and then attempt to negotiate an exit at a later date. certain price. Instead, the original buyer or seller can clear the trade with whoever is willing to sell or buy at that particular time. Standardization also allows standard futures contracts to be traded on an exchange, which is a central marketplace that brings buyers and sellers together. The convergence of buyers and sellers causes market payments to be created and increased. In other words, the ability to buy or sell quickly and easily with little or no price movement.
Option contracts are contracts that give the holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) option. a property. The price at which the sale takes place is called the decided price (spot price, strike price), and is determined at the time the parties enter into the option. Options contracts also specify an expiration date. In the case of a European option, the holder has the right to demand that the sale take place on (but not before) the expiration date, in the case of a US option the holder can claim the The sale will take place at any time up to the maturity date. If the owner of the contract exercises this right, the counterparty is obligated to execute the transaction. Options include two types: options buy (Call) and put options (Put). The buyer of a call option has the right to purchase a certain amount of the underlying asset, at a specified price, on or before a specified date in the future, however he is not obligated to exercise the right. buy this. Likewise, the buyer of a put option has the right to sell a certain amount of the underlying asset, at a specified price, on or before a certain date in the future, however he is not obligated to must exercise this right of sale.
A binary option is a contract that provides the holder with an all-or-nothing (all-or-no) profit record.
Warrants: In addition to the commonly used short-term options that have a maximum maturity of 1 year, there exist several longer-term options called warrants. These options contracts are usually traded on the OTC market.
Swaps are contracts for the exchange of cash (cash flows) on or before a specified date in the future, based on the underlying value of the exchange rate, bond yield/interest rate , trade in commodities, stocks or other assets. Another term commonly associated with swaps is a swaption, which is essentially an option based on a forward swap. Similar to a call option.and a putoption, an option swap is of two types: a payee swap and a payee swap. On the one hand, in the case of a receiver swap, there is an option in which you can receive fixed interest and pay floating interest. On the other hand, a payer swap is an option to pay fixed interest and receive floating interest.
Swaps can basically be classified into two categories:
Interest Rate Swaps: These derivatives essentially require a swap involving only cash flows in the same currency, between two parties.
Currency Swap: In this type of swap, the cash flow between two parties includes both principal and interest. In addition, the currencies to be swapped are in different currencies for both parties.
