An exchange traded derivative is a financial instrument that derives its value from an underlying asset. The most common types of derivatives are futures contracts and options contracts. These contracts are traded on exchanges, and the prices of these contracts are determined by the supply and demand of the participants in the market.
Derivatives are used by investors to speculate on the future price of an underlying asset, or to hedge against the risk of price fluctuations. For example, a futures contract allows an investor to buy or sell an underlying asset at a specified price at a future date. An options contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price at a future date.
Derivatives are often used in conjunction with other financial instruments to create investment strategies. For example, an investor might use a futures contract to speculate on the future price of a stock, and then use an options contract to hedge against the risk of the stock price falling.
What are the major types of derivative securities?
There are four major types of derivative securities:
1. Futures contracts: These are legally binding agreements to buy or sell an asset at a set price at a future date. Futures are often used to hedge against price movements in the underlying asset.
2. Options: These give the holder the right, but not the obligation, to buy or sell an asset at a set price at a future date.
3. Swaps: These are agreements between two parties to exchange cash flows in the future, based on the underlying asset's price movements.
4. Forward contracts: These are agreements to buy or sell an asset at a set price at a future date. Unlike futures contracts, forward contracts are not traded on an exchange. What is the difference between securities and derivatives? Securities are financial instruments that represent ownership of an asset, such as a stock or bond. Derivatives are financial instruments whose value is derived from the value of another asset, such as a stock index or currency.
What is derivatives in simple words?
A derivative is a type of financial contract whose value is based on, or "derived from," the value of an underlying asset. The most common types of derivatives are futures contracts, options, and swaps.
Derivatives can be used for a variety of purposes, including hedging ( mitigating risk by offsetting exposure to price changes in the underlying asset), speculation (betting on the future direction of prices), and arbitrage (taking advantage of price differences in different markets). What is a derivative investment example? There are many types of derivative investments, but they all involve taking a position on the future price of an underlying asset. For example, you might buy a futures contract on a stock index, betting that the index will rise in value. Or you might buy a put option on a stock, betting that the stock will fall in value.
Derivatives can be used to hedge against risk, or to speculate on future price movements. They can be traded on exchanges, or Over-The-Counter (OTC). What is the synonym of derivative? A derivative is a security with a price that is dependent upon or derived from the price of another security. The most common types of derivatives are futures, options, and swaps.