DERIVATIVE INSTRUMENTS

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Derivative Instruments are financial products with a payout determined by the value of another financial instrument, usually referred to as the “underlying”.

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The use of margin or other forms of leverage and the inclusion of contingencies are conceptually related to derivative instruments and underpin their evolution and uses.

 

At a basic level derivatives include futures, forwards and options.

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More complex instruments include swaps, credit derivatives, exotic options and exchange traded notes.

 

Derivatives may trade in exchanges (listed) or privately (“over the counter – or “OTC”).

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Capital markets instruments such as convertible bonds and warrants share or embed some derivative features, as their value depends on the value of an underlying.

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Some definitions of derivatives include exchange traded funds ("ETFs"), as they usually derive their value from other instruments, and may provide leveraged exposure to an underlying.

 

Some related terms:

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“Long position”:  A position that benefits when the underlying price increases

“Short position”: A position that benefits when the underlying price decreases

“Leverage”: The exposure to the price movement of multiple units of underlying per unit of investment.