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.[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.
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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).[2]In the UK, all financial markets, including derivatives, are regulated by the Financial Services Authority (FSA).[3]
Leverage, Risk and Reward
References
- ↑ The Structure of OTC Derivatives Markets. The Financier. Retrieved on February 24, 2008.
- ↑ About The CFTC. CFTC. Retrieved on May 8, 2008.
- ↑ What We Do. FSA. Retrieved on May 8, 2008.
