# Derivative (finance)

**derivativesderivativefinancial derivativesfinancial derivativederivatives tradingderivative contractderivative productsderivative contractsderivative instrumentderivative instruments**

In finance, a derivative is a contract that derives its value from the performance of an underlying entity.wikipedia

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### Swap (finance)

**swapsswapfinancial swap**

Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile. There are two groups of derivative contracts: the privately traded over-the-counter (OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges. Products such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are almost always traded in this way.

A swap is defined as a derivative in which two counterparties exchange cash flows and liabilities of one party's financial instrument for those of the other party's.

### Futures contract

**futuresfutures contractsfutures trading**

Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps.

Because it is a function of an underlying asset, a futures contract is a derivative product.

### Underlying

**underlying instrumentunderlying assetunderlier**

This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying".

In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying.

### Commodity

**commoditiescommodity pricescommodity good**

The assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation.

The price of a commodity good is typically determined as a function of its market as a whole: well-established physical commodities have actively traded spot and derivative markets.

### Foreign exchange derivative

**(FX) derivativescurrency derivativesForeign exchange**

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile.

A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rate(s) of two (or more) currencies.

### Interest rate derivative

**interest rate derivativesinterest rate derivative (IRD)fixed income derivatives**

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile.

In finance, an interest rate derivative (IRD) is a derivative whose payments are determined through calculation techniques where the underlying benchmark product is an interest rate, or set of different interest rates.

### Over-the-counter (finance)

**over-the-counterOTCover the counter**

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the New York Stock Exchange, while most insurance contracts have developed into a separate industry. There are two groups of derivative contracts: the privately traded over-the-counter (OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges.

OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such products.

### Equity derivative

**equity derivativesEquityEquity market**

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile.

In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities.

### Exchange-traded derivative contract

**exchange traded derivativesexchange-tradedexchange-traded derivatives**

There are two groups of derivative contracts: the privately traded over-the-counter (OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges.

Exchange-traded derivative contracts are standardized derivative contracts such as futures and options contracts that are transacted on an organized futures exchange.

### Stock

**equitiesequityshares**

Derivatives are one of the three main categories of financial instruments, the other two being stocks (i.e., equities or shares) and debt (i.e., bonds and mortgages).

A stock derivative is any financial instrument for which the underlying asset is the price of an equity.

### Libor

**London Interbank Offered RateLIBOR tenorLondon Inter-bank Offered Rate**

At least $350 trillion in derivatives and other financial products are tied to Libor.

### Hedge (finance)

**hedginghedgehedged**

Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.

### Bucket shop (stock market)

**bucket shopbucket shopsbucketing**

Bucket shops, outlawed in 1936, are a more recent historical example.

Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange.

### Moneyness

**in the moneyin-the-moneyout-of-the-money**

Based upon movements in the underlying asset over time, however, the value of the contract will fluctuate, and the derivative may be either an asset (i.e., "in the money") or a liability (i.e., "out of the money") at different points throughout its life.

In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option.

### Nick Leeson

**Leeson, N.Nicholas Leeson**

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures contracts.

Nicholas William "Nick" Leeson (born 25 February 1967) is a former English derivatives broker famous for bringing down Barings Bank, the United Kingdom's oldest merchant bank, into bankruptcy.

### Thales of Miletus

**ThalesThalisThales Avionics**

The oldest example of a derivative in history, attested to by Aristotle, is thought to be a contract transaction of olives, entered into by ancient Greek philosopher Thales, who made a profit in the exchange.

Another version of the story has Aristotle explain that Thales had reserved presses in advance, at a discount, and could rent them out at a high price when demand peaked, following his prediction of a particularly good harvest.

### Exotic derivative

**exotic derivativesexoticComplex Derivatives**

Products such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are almost always traded in this way.

An exotic derivative, in finance, is a derivative which is more complex than commonly traded "vanilla" products.

### CME Group

**CMECME Group Inc.Chicago Mercantile Exchange**

The world's largest derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange).

It owns large derivatives, options and futures exchanges in Chicago and New York City using its CME Globex trading platforms.

### Arbitrage

**arbitrage-freeregulatory arbitragearbitrageur**

Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset.

The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.

### Dow Jones Industrial Average

**Dow JonesDJIADow**

Investing in the DJIA is possible via index funds as well as via derivatives such as option contracts and futures contracts.

### Commodity Futures Trading Commission

**CFTCU.S. Commodity Futures Trading CommissionChairman of the Commodity Futures Trading Commission**

The Act delegated many rule-making details of regulatory oversight to the Commodity Futures Trading Commission (CFTC) and those details are not finalized nor fully implemented as of late 2012.

In 1998 CFTC chairperson Brooksley E. Born lobbied Congress and the President to give the CFTC oversight of 'off-exchange markets' for over-the-counter (OTC) derivatives in addition to its existing oversight of exchange-traded derivatives, but her warnings were opposed by other regulators.

### Forward contract

**forwardsforwardforward transactions**

Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile.

In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instrument.

### Foreign exchange option

**Currency optionforeign currency optionsforeign exchange**

In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.

### Gold as an investment

**goldgold bullionprice of gold**

Investors generally buy gold as a way of diversifying risk, especially through the use of futures contracts and derivatives.

### Option (finance)

**optionsoptionstock options**

Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward, option, swap); the type of underlying asset (such as equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (such as exchange-traded or over-the-counter); and their pay-off profile.

Options are part of a larger class of financial instruments known as derivative products, or simply, derivatives.