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A traditional financial instrument and a derivative financial instrument are similar conceptually, but they have a few main distinctions you should be aware of. Learn about the main distinctions between a traditional financial instrument and a derivative financial instrument with help from a certified financial planner in this free video clip.
Forwards and futures are both types of contracts used by commodity buyers and sellers to lock in a price for the future delivery of a specific commodity. Commodities are a large number of raw materials such as agriculture products, energy products or metals such as gold and copper. Only the futures offer an opportunity for individual traders to participate in these commodity values.
In the world of derivatives, equities get all the attention. If you're interested in derivatives, you've heard of option calls and puts, futures and warrants. The good news is that fixed-income derivatives aren't that different from equity derivatives, and can be used in a similar way to provide protection for fixed-income portfolios.
Fixed-income securities are investments that provide a regular return. Bonds issued by governments, corporations and banks are examples of this type of security. A fixed-income derivative is a contract whose value derives from the value of a fixed-income security. For instance, a bond future is a derivative priced in accordance with the anticipated price of an underlying bond or bond index. There are two basic types of fixed-income derivatives. The first type, interest-rate derivatives, is based on the direction of interest rates. The second type, credit derivatives, is based on credit risk, or the probability of a bond issuer defaulting…
Derivatives are an important part of the world's financial markets. Three examples of derivatives are futures contracts, forward contracts and option contracts. All of these derivatives reference an underlying security with an eye toward possible future changes in its value. However, there are important distinctions in the details of how these contracts are managed.
Financial derivatives are specialized contracts, the value of which is derived from some underlying assets, such as commodities, public equities, interest rates or even weather patterns.
