Financial derivatives are a financial instrument whose value depends directly on the value of another asset. The market value of financial derivatives in finance is based on the value of another asset called an adjacent derivative.
These financial products usually act in the stock exchange, although they are not required to do so. There are many examples of financial derivatives, such as stocks, fixed income, variable income, bonds or interest rates.
One of the characteristics of financial derivatives is that they can operate in private markets, although as we have already said, they are usually present in the stock markets. Despite this, they may be linked to uneconomic products, such as raw materials such as wheat.
The investments in financial derivatives that are made are much less than those that occur when you buy shares or other types of financial assets. These products have the quality that they will always be liquidated in the future.
Classification of financial derivatives
Depending on the way they are paid, we can distinguish different types of financial derivatives:
- Futures: these derivatives do not require paying anything at the time of acquisition, but a payment guarantee is necessary to meet the obligation. It has great risk, but it can also bring great benefits.
- Options: when acquiring this type of derivative you have to pay a small amount of money, called a premium. In this way, the benefits are limited, but the maximum loss that can be had is the value of the premium.