What are financial derivatives? The most important thing to know

sopna908

Derivatives are contracts binding two parties who agree to deliver a pre-agreed asset (or a pre-agreed derivative security) at a pre-agreed time and price. There are several types of underlying assets; They can be a financial asset, an index (a set of assets), a security or even an interest rate.  What are financial derivatives: overview, types, benefits and disadvantages The buyer agrees to purchase the specific asset on the predetermined date at the set price. In particular, the seller of a derivative does not have to be the owner of an underlying asset, since he can fulfill the contract simply by providing the buyer with enough money to purchase the agreed upon asset at the specified price. Let's see how it works.

Consider an American investor, Jeff, whose accounts are denominated in US dollars. Jeff goes and buys shares of a Spanish company through any of the EU stock exchanges that operate in euros. From that moment on, Jeff is vulnerable to the risk of a change in the exchange rate. If the value of the US dollar against the euro Fax Lists rises, Jeff will not benefit from selling his shares in that European company. If a seller gives a buyer another derivative, it will offset the value of the first contract. That is the main reason why derivative contracts are much easier to manage and trade than any type of underlying asset itself. Derivatives can serve as effective financial instruments to mitigate risk.



Derivatives are usually traded on specialized exchanges, although some of them are traded off-exchange or in the over-the-counter market. Types and classes of derivatives Derivative products fall into two classes: lock-up products (e.g. swaps) and options products (e.g. stock options). Lockout products seal the agreement between the relevant parties from inception to negotiated terms over the life of the contract. Option products provide the holder with the right (without any obligation) to trade the underlying asset at a specified contract price on or before the option's expiration. As we have already mentioned above, the value of a derivative is based on an asset; However, owning a derivative does not mean owning the asset itself.