Derivatives: forwards, futures, options, swaps
Derivative or derivative financial instrument represents, as a matter of fact, the contract, the value of which varies depending on the fluctuations of prices of the reference asset» (exchange rate, interest rates, the price of the goods or securities, etc). Speaking simply, it is a contract on transfer of funds or assets in the fixed term at a price determined at the moment of conclusion of the transaction.
Initially such transaction indeed in most of the cases were concluded with the aim of lending and risk hedging. For example, a manufacturer of grain negotiated with the consumer back in the spring, to what extent and at what price will be delivered in the autumn of grain, thus receiving a guarantee of product sales, as well as necessary in the period of sowing funds from the sale of the tool. The buyer could be perfectly calm for the fact that at the right moment would receive the goods, and also had a chance to win the price, since the fall of prices on the grain could go to the growth.
With time, however, the derivatives market has gained much more speculative nature, and now it is already not so much about the supply, how much of the game on the course of such securities. There were even contracts, called «settlement», which does not provide for delivery whatsoever on the expiration of the term of his actions.
several main types of derivatives:
forward implies the delivery of the asset by the vendor contract the buyer or the execution of the alternative monetary liabilities. Alternatively, the parties may arise mutual obligations in the time of the execution striker depending on what will be the value of the «underlying asset».
futures - in fact standardized forward contracts: the number of «underlying asset» is strictly defined, and the parties agree only on the price. Futures are freely traded on stock exchanges.
option unlike futures, gives the purchaser the right, but not the obligation, to buy (then talk about the option of a call) or sell (this is called a put option) a certain number of «reference asset at a specified price. There are standardized exchange-traded options and over-the-counter, concluded on arbitrary conditions.
the swap involves the conclusion of transactions on purchase/sale of an asset, with a simultaneous conclusion of counter transactions about the sale/purchase of the same asset over a specified period on the same or other conditions. Swaps, there are a great many, the majority pursue the purpose of hedging risks.
A curious kind of swap is a credit default swap, which represents an agreement, according to which the buyer makes a one-time or periodic payments to the seller of the swap, taking on the responsibility of redeem issued by a buyer to a third party credit, in the event of the insolvency of the borrower. Such is the cunning scheme. In case of default of the inconscient «third-party» the owner of the swap receives from the Issuer's indemnification of losses. This «insurance policy»that can be sold to buy as much as you like.
