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A derivative is an indispensable market instrument. Derivatives What are derivatives and why are they

If you are interested in economic news, you probably often come across such concepts as derivative financial instruments or financial derivatives. Today I will explain to you what it is, what it is used for, how the derivatives market works, and what benefits you can get from it. This information will be useful not only to those who practice or plan over-the-counter markets, but also to everyone else, simply for the general development and competent interpretation of financial news.

What are derivative financial instruments?

Derivative financial instruments (or financial derivatives) are exchange-traded contracts under which the parties receive the right or undertake the obligation to perform certain actions with a specified amount of an underlying asset in the future. Typically, this refers to the right or obligation to buy or sell the underlying asset at a predetermined price, but there may be other options.

A financial derivative differs from a traditional purchase and sale agreement in that it is more formal in nature, its purchase or sale is carried out by simply pressing a button on the trading terminal and does not require signature by the parties. Derivative financial instruments are much more often used as exchange-traded assets that are simply speculated on and do not involve any actual delivery or fulfillment of obligations.

There are 2 main purposes for using derivative financial instruments:

2. Speculative earnings.

Financial derivatives were originally developed to achieve the first goal, but currently are used primarily for the second.

In some countries, derivative financial instruments are treated like securities, that is, the same laws apply to their use as to the purchase, sale, storage valuable papers. In other countries there are separate laws for them, or the legislative framework So far it is completely absent (this also happens).

General characteristic feature All derivative financial instruments are that they are settled in the future (usually they have a specific settlement period or settlement date), and until the moment of settlement they are freely traded on the market as an exchange asset.

Financial derivatives: main characteristics.

As can be seen from the definition, one of the main characteristics of a financial derivative is underlying asset– the real asset or indicator for which it is issued. The underlying asset can be:

- Securities;

– Goods of global demand (oil, gold, metals, grain, etc.);

– Interest rates;

– Macroeconomic and statistical indicators;

– The derivative financial instruments themselves;

– Circumstances indicating failure to fulfill obligations (for example), etc.

In fact, the underlying asset for a derivative financial instrument can be almost anything that is somehow connected with an exchange or over-the-counter market, and not only. Every year there are now new financial derivatives based on new underlying assets.

Derivatives market.

Let's look at how the derivatives market works. First of all, there are two important points here:

1. The volume of derivative financial instruments issued for a certain underlying asset is not necessarily equal to the volume of this underlying asset actually circulating on the market, and may be more, even many times.

2. The issuer of a financial derivative does not have to be the owner of the underlying asset; it can be any participant in exchange trading.

Thus, it can be argued that the market for derivative financial instruments does not have a 100% connection with the market for the underlying assets under which they are issued: these two markets exist in parallel and are not absolutely dependent on each other.

However, the value of a financial derivative, of course, depends on the value of the underlying asset, and, as a rule, changes in the same direction. However, usually it is significantly, many times lower than the value of the underlying asset, and amounts to 1-10% of its value, less often - more.

The same traders often trade in the financial derivatives market and in the market for their underlying assets, using this instrument to hedge risk or speculative earnings. The volatility of the market for derivative financial instruments is generally significantly higher than the volatility of the market for their underlying assets. Therefore, their use for speculative purposes, on the one hand, promises more opportunities for profit, but on the other hand, carries more risks. For this reason, I would not recommend using the derivatives market as a speculative tool for novice traders.

Types of derivative financial instruments.

Let's look at several of the most common types of derivative financial instruments.

5. CFD Contracts (Contracts for Difference)– contracts involving the obligation to transfer the difference between current value the underlying asset and its price at the expiration date of the contract.

There are other types of derivatives, but these are perhaps the most common and widely used.

Now you have some idea of what financial derivatives are and how the derivatives market works, which means you will be able to more competently interpret financial news, and perhaps use these tools in your personal earnings and investing practice.

Add the site to your bookmarks, come in and improve your financial literacy: this quality today is one of the most necessary for life in the current realities.

Derivative- the basis of the document for the obligation to deliver or receive assets. A financial instrument that depends on the price of one or more securities.

Derivatives are used for forward transactions, hedging risks to make a profit for financial market players.

Description of a derivative in simple words

A rough example. You have found a company that sells a certain product cheaper than elsewhere, say, for 100 rubles. per kg. You need 10 tons of this product, but at the moment you do not have enough money. You sign papers with this company that it undertakes to sell you 10 tons of goods for 100 rubles. before the end of the week, and you leave a small advance payment for this. If you manage to find the money, then buy the goods at this price favorable price, and if you don’t have time, the company will sell it to other buyers and keep your prepayment for itself.

Derivative - information from Wikipedia

The derivatives market is a large segment of the financial system. With their help, investors neutralize risks on stock markets, share and limit negative consequences. Derivative financial instruments included in the investment portfolio allow you to reduce losses in the event of unsuccessful developments in the market situation.

In other words, a derivative is an agreement between parties under which they are obligated or have the right to transfer assets or funds on or before maturity at a certain value.

Purpose of acquiring a derivative- hedging price risk over time or generating income from changes in the value of the underlying asset. But the outcome can be both positive and negative for the parties to the transaction.

Derivative characteristics:

the price of a derivative changes following the value of the underlying asset (rate, commodity, security,
credit rating and other conditions);
small initial costs are required for purchase;
settlements on a derivative occur in the future relative to the moment of creation of the derivative.

Features of derivatives and underlying assets

Derivatives have their own characteristics:

urgency - the derivative is valid for a certain period;
contractuality is the result of fixed-term agreements;
profit orientation - receiving funds from changes in the price of a derivative.

A feature of derivatives is that the number of derivatives does not necessarily have to coincide with the number of underlying assets.

According to the agreement, assets can be different:

securities;
goods;
currency, interest rate, inflation;
official statistics;
agreements, derivatives of financial instruments and other assets.

Derivative terms

By mutual agreement of the parties, the terms of the derivative are determined. Contracts are drawn up containing:

name and parties to the agreement;
contract asset and characteristics - type of security, its price and currency, maturity and other conditions;
execution price, payment procedure and number of underlying assets;
type of contract (with or without delivery of an asset), scope of the agreement;
contract deadlines, responsibilities of the parties, disagreements and disputes;
addresses, signatures and bank details.

Advantages and disadvantages of using derivatives

The role of derivatives in financial processes is not always clear. On the one hand, derivatives redistribute risks and reduce the costs of financial intermediation. But, on the other hand, derivatives pose significant threats.

The benefits include various conditions.

Flexibility. You can come to an agreement and execute a deal with different options that are not traded on the exchange.

Securization. Bank loans are replaced by securities, and suitable competitive conditions are created. That is, one asset is replaced by another, this allows the bank to distribute risk and attract more investors.

Reduced costs. The costs of financial transactions are reduced, the volume of investments is minimized, and the risk of possible loss is reduced.

Small amounts of initial capital can bring both profit and loss. Investors take on huge risks of losing money.

Among the disadvantages of derivatives, conditions are noted.

Failure to fulfill obligations under the contract. Unlike settlements with securities (the assets of the transaction are prepaid), in the derivatives market such a situation is impossible.

Lack of protection for OTC derivatives. Derivatives are not protected by law. Laws classify derivatives transactions as bets that are not subject to judicial protection.

Hiding profits. Derivatives are often used to avoid taxes and carry forward balance sheet results from one quarter to another.

Futures- agreement on the purchase and sale of the underlying asset at the cost at the time of execution of the agreement. The sale or purchase occurs in the future at a certain date. Futures operate on exchanges.

Forward- non-standard contract, over-the-counter equivalent. The purchase and sale and terms are determined between the buyer and seller.

Option- the buyer has the right to complete the purchase and sale transaction, provided that he pays the seller a fee.

With proper use of derivatives, you can reduce risks and increase profits.

Derivative financial instruments (DFIs) are secondary financial instruments, derivatives of primary financial instruments - underlying assets.

These are contracts/agreements/agreements on rights/obligations under them with settlements to be made in the future. Another name is derivative (from the English derivative - “derivative function”).

The essence of the concept is insurance (hedging) of the acquisition/change in the value of tangible/intangible assets in the future. For example, a continuously operating enterprise may enter into a contract to supply certain raw materials by a certain date at a cost today, for example, oil at a price of $15 per barrel. Perhaps at the time of delivery it will cost less ($12 per barrel), then the raw material will be purchased with a slight overpayment, but the main thing is that it will be there, and it is possible that the cost will become higher ($16 per barrel), then the purchase of raw materials will be guaranteed according to the agreement, $15 will add some profit.

An asset can be a commodity, currency, stock index, financial indicator, security, statistical data (inflation rate, for example), debt instrument, interest rate, other derivative, etc. Accordingly, the derivative will be currency, index, interest rate, commodity, credit, bond/share/bill, etc.

In practice, derivatives are used not only for insurance, but also for speculation - their acquisition requires significantly less investment in comparison with other contracts that similarly react to changes in market variables.

Kinds

Derivatives are divided into:

forward transactions (futures/forwards, options/swaps) and structured products (OFBU, credit notes);
exchange-traded (futures, options) and over-the-counter (option certificates, stock warrants, forwards, swaps sold on the interbank market). The volumes of exchange-traded derivatives are much smaller than over-the-counter OTC instruments - their share in the total volume of unexpired derivatives according to 2016 data was less than 12% (this is largely due to shorter-term circulation).

* Futures/forwards, options/swaps are paired concepts: some are traded on exchanges, others are traded outside centralized trading platforms.

A derivative can be:

with mandatory execution of the agreed action(s) in the future (for example, forwards);
with the possibility of performing/non-executing an action at the discretion of one of the parties (for example, options);
with counter transaction obligations (for example, REPO);
with the appearance of obligations upon the occurrence of an event specified in the contract (for example, a credit default swap);
with agreed asset management (eg credit note).

The division into groups is very arbitrary - derivatives can combine more than one type, but be a combination of several. The most common derivative in the world is the interest rate swap.

Conclusion

On the one hand, the multidimensionality and flexibility of the derivatives market provides extensive opportunities for risk insurance/cost reduction; on the other hand, with an uncontrolled increase in volumes and an overestimation of the real value, it can lead to an economic crisis.
Taxes
Financing
Financial planning
Financial assets
Holdings Currency Money
Securities
Financial ratios
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Financial control :
Financial right

Derivative financial instrument, derivative(English) derivative) - an agreement (contract) for the implementation for its parties of rights and/or fulfillment of obligations associated with changes in the price of the underlying asset underlying this financial instrument, and leading to a positive or negative financial result for each party. The underlying asset under this agreement may be:

official statistical information;
physical, biological and/or chemical indicators of the state of the environment;
circumstances indicating non-performance or improper performance by one or more legal entities, states or municipalities of their responsibilities;
contracts that are derivative financial instruments;
circumstances that are provided for by federal laws or regulations of the federal executive body for the securities market and regarding which it is unknown whether they will occur or not;
values calculated on the basis of one or a combination of several of the above indicators, the prices or conditions of which are based on the corresponding parameters of another financial instrument, which will be the base.

A derivative financial instrument can have more than one underlying asset.

Typically, the purpose of purchasing a derivative is not to obtain the underlying asset, but to hedge price or currency risk over time or to obtain speculative profit from changes in the price of the underlying asset. Distinctive feature derivatives is that they are not related to the amount of the underlying asset traded on the market. Owners of the underlying asset generally have no involvement in the issuance of derivatives. For example, the total number of CFD contracts on company shares can be several times more quantity issued shares, while this joint stock company itself does not issue derivatives and does not trade them on its shares.

The derivative has the following characteristics:

its value changes following changes in the price of the underlying asset ( interest rate, commodity or security price, exchange rate, price index or rates, credit rating or credit index, other variable);
to acquire it, small initial costs are sufficient compared to other instruments, the prices of which react in a similar way to changes in market conditions;
calculations for it are carried out in the future.

Essentially, a derivative is an agreement between two parties in which they undertake an obligation or acquire the right to transfer a specified asset or sum of money on or before a specified date at an agreed upon price.

There are some other approaches to defining a derivative financial instrument. According to these definitions, the indicator of urgency is optional - it is sufficient only that the instrument is based on another financial instrument. There is also an approach according to which only one that is expected to generate income from price differences can be considered a derivative instrument and is not intended to use this instrument for the delivery of a commodity or other underlying asset.

Features of derivative instruments

Derivative financial instruments are based on an underlying asset. There are derivatives on other derivatives, such as an option on a futures contract.

As a rule, derivatives are used not for the purpose of buying and selling the underlying asset, but for the purpose of generating income from differences in prices.

The derivatives market is directly related to the securities market or commodity market. These markets are built on the same principles, pricing in these markets follows the same laws and, as a rule, the same participants trade on them.

Examples of derivatives

30s of the 17th century. Tulip mania

60s of the XIX century. The emergence of the first modern futures contracts

On the London Stock Exchange, trading put and call options came into practice in the 30s of the 19th century. On American stock exchanges, trading options on commodities and stocks became common practice by the 60s of the 19th century. The first Chicago Board of Trade forward contract for which there is a registration record was dated March 13, 1851. In 1865, the Chamber formalized grain trading by introducing contracts called futures. These contracts standardized: quality, quantity, time and place of grain delivery.

70s of the XX century. The emergence of financial futures

In 1972, a new division was created at the Chicago Mercantile Exchange - the International Monetary Market. It became the first specialized exchange platform for trading financial futures contracts - currency futures. Previously, only commodities were used as the underlying asset of futures. In 1973, the Chicago Board of Trade established the Chicago Board Options Exchange. By the end of the 1970s, financial futures were traded on exchanges around the world.

Notes

Literature

John C. Hull. Options, Futures and Other Derivatives. - 6th ed. - M.: "Williams", 2007. - P. 1056. - ISBN 978-5-8459-1205-3

Derivatives: Course for Beginners = An Introduction to Derivatives. - M.: "Alpina Publisher", 2009. - 208 p. - (Reuters Series for Financiers). -

The prices or terms of which are based on the corresponding parameters of another financial instrument, which will be the underlying one. Typically, the purpose of purchasing a derivative is not to obtain the underlying asset, but to profit from changes in its price. A distinctive feature of derivatives is that their quantity does not necessarily coincide with the quantity of the underlying instrument. Issuers of the underlying asset generally have nothing to do with the issuance of derivatives. For example, the total number of CFD contracts on company shares can be several times greater than the number of issued shares, while this itself Joint-Stock Company does not issue or trade derivatives on its shares.

The derivative has the following characteristics:

its value changes in response to a change in an interest rate, the price of a commodity or security, an exchange rate, an index of prices or rates, a credit rating or credit index, or another variable (sometimes called an “underlying”);
its acquisition requires a small initial investment compared to other instruments, the prices of which react in a similar way to changes in market conditions;
calculations for it are carried out in the future.

Essentially, a derivative is an agreement between two parties whereby they assume the obligation or right to transfer a specified asset or sum of money on or before a specified date at an agreed upon price.

Most derivative financial instruments, in accordance with Russian legislation, are not recognized as securities, as interpreted in the Federal Law “On the Securities Market”. The exception is the issuer option. However, there is such a term as derivative security. This concept includes instruments based on securities (forward contract on a bond, option on a share, depository receipt).

Features of derivative instruments

Derivative financial instruments are based on other financial instruments: currencies, securities. There are derivatives on other derivatives, such as an option on a futures contract.

As a rule, derivatives are used not for the purpose of buying and selling the underlying asset, but for the purpose of generating income from differences in prices.

The derivatives market is directly related to the securities market. These markets are built on the same principles, pricing in these markets follows the same laws and, as a rule, the same participants trade on them.

Examples of derivatives

Literature

John C. Hull Options, Futures and Other Derivatives. - 6th ed. - M.: “Williams”, 2007. - P. 1056. - ISBN 0-13-149908-4

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