Sophisticated financial instruments whose value derives from underlying assets
These sophisticated global marketplaces facilitate the trading of financial instruments whose value derives from underlying assets rather than direct ownership. When you participate in derivatives markets, you're trading contracts that derive their price from the performance of assets like stocks, bonds, commodities, currencies, interest rates, or market indexes, without necessarily owning the underlying assets themselves.
Rights, not obligations
Standardized contracts
Exchange of cash flows
Customized OTC contracts
Contracts giving buyers the right (but not obligation) to buy or sell an underlying asset at a predetermined price before a specific expiration date.
Examples
Call options, put options, covered calls
Trading Venue
Exchanges and OTC
Standardization
Standardized on exchanges
Primary Purpose The main reasons these derivatives are used in markets.
Hedging, income, speculation
Risk Profile
Limited loss for buyers
Margin/Collateral
Premium payment, some margin
Settlement Options
Cash or physical
Key Participants
Investors, portfolio managers
Market Size (2023)
~$70 trillion notional
Regulation Level
High on exchanges
Did you know? Options were first formally traded in 1973 with the creation of the Chicago Board Options Exchange (CBOE), though informal options contracts have existed for centuries.
Standardized contracts obligating parties to buy or sell an asset at a predetermined future date and price.
Examples
Commodity futures, stock index futures, currency futures
Trading Venue
Primarily exchanges
Standardization
Highly standardized
Primary Purpose The main reasons these derivatives are used in markets.
Hedging, price discovery
Risk Profile
Potential for significant losses
Margin/Collateral
Initial and maintenance margin
Settlement Options
Cash or physical
Key Participants
Hedgers, speculators, arbitrageurs
Market Size (2023)
~$120 trillion notional
Regulation Level
High
Did you know? The first modern futures contracts were developed in Japan during the 1700s for rice trading, called 'rice tickets,' which allowed merchants to secure future rice deliveries.
Over-the-counter agreements between parties to exchange cash flows or other financial instruments based on different variables.
Examples
Interest rate swaps, currency swaps, credit default swaps
Trading Venue
Primarily OTC
Standardization
Semi-customizable
Primary Purpose The main reasons these derivatives are used in markets.
Risk management, arbitrage
Risk Profile
Counterparty and market risk
Margin/Collateral
Credit support annexes
Settlement Options
Cash flows only
Key Participants
Financial institutions, corporations
Market Size (2023)
~$600 trillion notional
Regulation Level
Moderate, increasing
Did you know? The interest rate swap market is the largest derivatives market in the world, with notional amounts exceeding several hundred trillion dollars.
Customized contracts similar to futures but traded over-the-counter rather than on exchanges.
Examples
Forward rate agreements, currency forwards
Trading Venue
Exclusively OTC
Standardization
Fully customizable
Primary Purpose The main reasons these derivatives are used in markets.
Hedging currency/rate risk
Risk Profile
Counterparty and market risk
Margin/Collateral
Typically none until settlement
Settlement Options
Typically physical
Key Participants
Multinational corporations, banks
Market Size (2023)
~$80 trillion notional
Regulation Level
Low to moderate
Did you know? Forward contracts are one of the oldest forms of derivatives, dating back to medieval trade fairs where merchants would agree on future deliveries of goods.
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