Derivatives

Derivative Instruments

(1) A contract, such as an option or futures contract, whose price is derived from the price of the underlying financial asset.

(2) A financial obligation that derives its precise value from the value of one or more other instruments (or assets) at that same point in time

In finance, a Derivative is a financial instrument whose value depends on other, more basic, underlying variables. Such variables can be the price of another financial instrument (the underlying asset), interest rates, volatilities, indices, etc. There are many kinds of derivatives, with the most common being swaps, futures, and options. Derivatives are a form of alternative investment.

A Derivative is not a stand-alone asset, since it has no value of its own. However, more common types of derivatives have been traded on markets before their expiration date as if they were assets. Among the oldest of these are rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.


Derivatives are usually broadly categorized by:
Derivatives are used by investors to:
Another arbitrary distinction is between:
Risk Reduction

Derivatives can be considered as providing a form of insurance in hedging, which is itself a technique that attempts to reduce risk.

Derivatives allow risk related to the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available because of events unspecified by the contract, such as the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counter-party risk.

Derivatives designed for and can serve legitimate business purposes.

We can discuss with you your needs in this area; in particular Risk Mitigation using Derivate Interments in Hedging Portfolio Risk or using them for Enhancing Portfolio Returns.

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