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Chapter 3 — FINANCIAL DERIVATIVES
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FINANCIAL DERIVATIVES

FINANCIAL DERIVATIVES


Tap below to watch a short video about derivatives, and read on for more details.

Learn more about what financial derivatives are and how they work.


The financial derivative is a special type of contract that derives its value from an underlying entity, such as an asset or an index. The financial derivative can be used to ensure against price movements (often referred to as hedging) among other things. However, a word to the wise, be careful when trading as these products are a bit complex and result in a larger amount of risk.

Financial derivatives

OPTIONS

A financial derivative that represents a contract sold by one party (referred to as an option writer) to another party (the option holder), which allows the option holder the right (not the obligation) to buy or sell securities at an agreed upon date during a certain period of time or by a specific date.

FUTURES

The financial derivative, that forces the buyer to purchase a security or, conversely, the seller to sell it, at a predetermined future date and price. These assets can be a physical commodity or a financial instrument, and their quality and quantity are determined by the derivative.

FORWARD CONTRACT

This is a customized financial derivative between two investors to buy (or sell) an asset at a precise price and date in the future. These do not trade on a centralized exchange and are considered over-the-counter instruments.

SWAP

This is a derivative in which two parties exchange the cash flows of one party’s financial instrument for those of the other party’s financial instrument. Swap derivatives are typically used to hedge the risk of future changes in interest rates or to take advantage of anticipated changes in rates.

Quiz

What are derivatives?

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0/76 (0%) Correct
  • 1
    Shares of a company
  • 2
    Marketplaces where you can exchange stocks
  • 3
    A special type of contract that derives its value from an underlying entity
  • 4
    A debt based investment where an investor loans money to an entity such as a corporation
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