Derivatives are financial instruments whose value is derived from the value of something else.

The main types of derivatives are: futures forwards options swaps

pose unsuitably high amounts of risk for small or inexperienced investors

are complex instruments devised as a form of insurance, to transfer risk among parties based on their willingness to assume additional risk, or hedge against it

typically have a large notional value massively leverage the debt in an

economy

The main use of derivatives is to reduce risk for one party while offering the potential for a high return (at increased risk) to another.

One use of derivatives is as a tool to transfer risk by taking the opposite position in the futures market against the underlying commodity.

Speculators may trade with other speculators as well as with hedgers. In most financial derivatives markets, the value of speculative trading is far higher than the value of true hedge trading.

OTC AND EXCHANGE-TRADED:

• Over-the-counter (OTC) • Exchange-traded derivatives (ETD) COMMON DERIVATIVE CONTRACT

TYPES:• Futures/Forwards• Options• Swaps

Over-the-counter derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary.

Exchange-traded derivatives are those derivatives products that are traded via specialized derivatives exchanges or other exchanges.

Futures:

A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time, that has been standardised for a wide range of uses. It is traded on a futures exchange

A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time.

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Exchange traded options

Over-the-counter options

Employee stock options

A swap is the exchange of one set of cash flows for another.

A swap is a contract between two parties in which the first party promises to make a payment to the second and the second party promises to make a payment to the first.

Interest rate swaps Currency Swaps Commodity swaps Equity swaps Interest rate swaps

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Veronika JablonickáVeronika Jablonická

Katarína KotrusováKatarína Kotrusová