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Glossary

Derivative

Category — Derivatives

A derivative or derivative financial instrument is a financial contract based on the future value of the underlying asset.

Underlying asset is an asset that underlies a derivative financial instrument. There are several types of underlying assets: securities, currencies, commodities, stock indices, interest rates, etc.

The purpose of transactions with a derivative can be both the physical acquisition of the underlying asset, and risk hedging (opening an opposite position) and obtaining speculative profit from changes in the price of the underlying asset.

The issuer of a derivative is not necessarily the owner of the underlying asset. Considering the purpose of transactions with derivatives, the parties of the transaction with derivative financial instruments may not focus on the supply of real assets, their interest may be in obtaining a difference in price. In this case, the contract will be non-deliverable.

 

Main types of derivatives:

- forward contracts;

- futures contracts;

- options;

- swaps.

Derivatives are traded on two markets: exchange-traded and over-the-counter (OTC). The exchange derivatives market is dominated by standardized contracts with publicly available quotes. OTC derivatives are traded between two parties, usually without other intermediaries.

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