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A guide to derivatives - New Zealand Bankers' Association
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Interest Rate Options
Develop and improve products. List of Partners vendors. An exchange-traded derivative is merely a derivative contract that derives its value from an underlying asset that is listed on a trading exchange and guaranteed against default through a clearinghouse. Due to their presence on a trading exchange, ETDs differ from over-the-counter derivatives in terms of their standardized nature, higher liquidity , and ability to be traded on the secondary market.
ETDs include futures contracts, options contracts , and futures options.
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In the first half of , the World Federation of Exchanges reported that a record Exchange-traded derivatives are well suited for the retail investor , unlike their over-the-counter cousins. In the OTC market, it is easy to get lost in the complexity of the instrument and the exact nature of what is being traded. In that regard, exchange-traded derivatives have two big advantages:.
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The exchange has standardized terms and specifications for each derivative contract, making it easy for the investor to determine how many contracts can be bought or sold. Each individual contract is also of a size that is not daunting for the small investor.
The derivatives exchange itself acts as the counterparty for each transaction involving an exchange-traded derivative, effectively becoming the seller for every buyer, and the buyer for every seller. This eliminates the risk that the counterparty to the derivative transaction may default on its obligations.
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Another defining characteristic of exchange-traded derivatives is their mark-to-market feature, wherein gains and losses on every derivative contract are calculated on a daily basis. If the client has incurred losses that have eroded the margin put up, they will have to replenish the required capital in a timely manner or risk the derivative position being sold off by the firm.
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A futures contract is merely a contract specifying that a buyer purchases or a seller sells an underlying asset at a specified quantity, price, and date in the future. Futures are used by both hedgers and speculators to protect against or to profit from price fluctuations of the underlying asset in the future. There are even futures based on forecasted weather and temperature conditions. Depending on the exchange, each contract is traded with its own specifications, settlement, and accountability rules.
Options are derivatives that grant the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified date and quantity. The options market has seen remarkable growth since the first standardized contract was traded in TMX Group Limited and its affiliates have not prepared, reviewed or updated the content of third parties on this site or the content of any third party sites, and assume no responsibility for such information.
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A guide to derivatives
Find Quote Search Site. Interest Rate Derivatives. Eurodollar — The first futures contract to feature cash settlement, the Eurodollar is the most actively traded futures contract making it a highly liquid market. The Eurodollar, itself, is a dollar denominated deposit that is held in a bank outside of the U.
These deposits can be held all over the world and not just in Europe, though that is where the term originated from.
The fact that they are held outside of the U.