Derivative is an indispensable tool of the market

Due to its flexibility and multidimensionality, the derivatives market offers the widest opportunities to reduce costs, insurance risks, but it can also cause a variety of crisis phenomena. It is precisely in the uncontrollability of the growth in the volumes of derivatives that their threatening power lies. Despite such a dubious reputation, these financial instruments have been attracting interest for a long time. A derivative is what? With what do they "eat"?

What does the word derivative mean?

In English, the derivative is the "derivative". And what does this designation mean? Derivative is a derivative financial instrument. In other words, it is an obligation to put the underlying asset underlying the derivative up to a certain time. Also, the derivative is a financial instrument for futures deals, that is, agreements of several parties that previously determine their obligations and rights for the future with respect to underlying assets.

What is attributed to derivatives of the stock market?

Financial derivatives are, by definition, futures and forward contracts, over-the-counter and stock options, exchange derivatives on the swap and swaps themselves.

What are the functions of derivatives?

A derivative is a security that performs certain functions. For example, an important property consists in hedging (insurance) the possibility of price changes in the future on intangible assets (which include stock indexes), on goods, on the cost of loans. This is the essence of derivatives of financial markets. If we talk about commodity hedging, then derivatives are irreplaceable regulatory instruments that allow commodity producers to hedge against possible future adverse changes in prices for their product.

Why exactly "derivative" tools?

For all the seeming complexity, derivatives are securities with a fairly simple use. Derivatives are named because the formation of prices for derivatives depends on the change in the value of the underlying asset that underlies them. For example, if the price of gold changes, then the price of the derivative will also be different. That is why it is always necessary to say to which underlying asset is one or another derivative financial instrument.

What are the different types of derivatives?

There are several basic types of this financial instrument.

1. Derivatives in the currency and stock markets, which are contracts for the purchase and sale of different currencies. A prerequisite is the execution after a while, which depends on the change in the exchange rate of the currency being sold or bought, and in the case of the stock market, there is a direct dependence on such a basic asset as the share. These derivatives can also be classified into three main groups: forwards / futures, swaps and options. The former depend directly on the future price of the underlying assets. Swap contracts depend on the ratio of the price at the moment to the price in the future. Options - from the change in value, but slightly less than futures and forwards. These groups, except for swaps, are called "the main urgent instruments".
2. Derivatives are interest-bearing. This tool appeared due to periods of destabilization of interest-bearing short-term rates. The interest derivative is a hedging instrument for risks, its application further affects the provision of liquidity in the borrowed capital markets and the possibility of fixing certain rates of company profits in the future. The most widespread use on the international market was interest swaps, options "flor" and "cap".
3. Credit derivatives are over-the-counter structured financial instruments that separate credit risks from assets in order to transfer them to a counterparty in the future. These derivatives allow the beneficiary to transfer credit risks on assets to the guarantor's side without the necessary sale of the asset.