What is a derivative in finance?
Posted: Sun Jan 12, 2025 4:32 am
The derivative financial product is presented in the form of a contract between two parties that defines a financial exchange. It will occur in the future and also depends on the price of the asset in question. This is the main definition of the derivative product. But this contract has many other interests and we will detail them here to allow you to better understand the advantages and disadvantages of the derivative product.
In the financial world today, we rcs database see that a large part of the products that we use are derivatives. It is therefore a contract made between two parties (or more). This product draws its value from an asset that we call the underlying. Derivatives are generally used by traders as a means of speculation concerning the traffic linked to the movements that the underlying asset will take. This can indeed go up or down.
These different contracts can be traded over the counter (or OTC) or on the stock exchange. You have the choice to select the assets that suit you. There are indeed many, including for example:
- The clues;
- Forex;
- Raw materials;
- Cryptocurrency;
- Actions;
- Obligations;
- Interest rates.
Financial derivatives come in different types. Firstly, there is a difference between OTC derivatives and exchange-traded derivatives. An OTC product will have a negotiation carried out directly. The product will thus be exchanged privately. The terms of the contract are then agreed upon by both parties. For exchange-traded derivatives, they are bought and sold on the exchange. The contract will then be standardized and its terms will be respected.
The first derivatives were traded over the counter. However, this created a counterparty risk. One of the parties could indeed not fulfill its obligations. With the stock exchanges, the transactions became standardized. They required traders to keep a certain amount of coverage, which significantly reduced the risks. Payment obligations are then respected.
Trading derivatives will consist of selling or buying a derivative contract to speculate . It will be possible to negotiate the various movements in progress without necessarily needing to have purchased the derivative. To trade a derivative, it is essential to negotiate large amounts of capital. It is then advisable to use a broker to secure your actions.
To take a concrete example of what derivatives are, we can say that the first derivatives appeared to allow companies to hedge against changes in the prices of raw materials. Thus, by purchasing a large number of raw materials, the company will significantly reduce the risk of price increases.
A derivative product will involve 2 people: the buyer and the seller. When the contract between these two parties is signed, an initial sum will be paid (the premium). If the buyer decides to sell his derivative before the contract expires and makes money on this sale, he will realize a capital gain. Simpler than a complex financial instrument, the derivative product remains a safe bet for those who are not experts in the financial field.
In the financial world today, we rcs database see that a large part of the products that we use are derivatives. It is therefore a contract made between two parties (or more). This product draws its value from an asset that we call the underlying. Derivatives are generally used by traders as a means of speculation concerning the traffic linked to the movements that the underlying asset will take. This can indeed go up or down.
These different contracts can be traded over the counter (or OTC) or on the stock exchange. You have the choice to select the assets that suit you. There are indeed many, including for example:
- The clues;
- Forex;
- Raw materials;
- Cryptocurrency;
- Actions;
- Obligations;
- Interest rates.
Financial derivatives come in different types. Firstly, there is a difference between OTC derivatives and exchange-traded derivatives. An OTC product will have a negotiation carried out directly. The product will thus be exchanged privately. The terms of the contract are then agreed upon by both parties. For exchange-traded derivatives, they are bought and sold on the exchange. The contract will then be standardized and its terms will be respected.
The first derivatives were traded over the counter. However, this created a counterparty risk. One of the parties could indeed not fulfill its obligations. With the stock exchanges, the transactions became standardized. They required traders to keep a certain amount of coverage, which significantly reduced the risks. Payment obligations are then respected.
Trading derivatives will consist of selling or buying a derivative contract to speculate . It will be possible to negotiate the various movements in progress without necessarily needing to have purchased the derivative. To trade a derivative, it is essential to negotiate large amounts of capital. It is then advisable to use a broker to secure your actions.
To take a concrete example of what derivatives are, we can say that the first derivatives appeared to allow companies to hedge against changes in the prices of raw materials. Thus, by purchasing a large number of raw materials, the company will significantly reduce the risk of price increases.
A derivative product will involve 2 people: the buyer and the seller. When the contract between these two parties is signed, an initial sum will be paid (the premium). If the buyer decides to sell his derivative before the contract expires and makes money on this sale, he will realize a capital gain. Simpler than a complex financial instrument, the derivative product remains a safe bet for those who are not experts in the financial field.