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In finance, a derivative security is a contract that specifies the rights and obligations between the issuer of the security and the holder to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. ...
A contract is any legally-enforceable promise or set of promises made by one party to another and, as such, reflects the policies represented by freedom of contract. ...
In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, usually tied to a specific project. ...
Securities are tradeable interests representing financial value. ...
In business and accounting an asset is anything owned, whether in possession or by right to take possession, by a person or a group acting together, e. ...
Properties
A derivate can have a large number of properties, so that its value depends on many factors. The terms and payments can be derived from the price of a security or commodity, a published statistics, an event (such as default on payment), or something else. // Headline text Link titleBold textBold textBold textBold textBold textThey are often represented by a certificate. ...
The word commodity is a term with distinct meanings in business and in Marxist political economy. ...
Default is the name of a number of quite different concepts. ...
Derivatives which are fully standardized like futures and many options are generally traded through a securities exchange or futures exchange. "Over-the-counter" derivatives are negotiated privately between parties, and the terms can generally be customized to meet the parties' needs. Those standardized contracts traded on an exchange will generally have much greater liquidity. A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time, that has been standardised for a wide range of uses. ...
In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) on or before a future date (the exercise date). ...
A securities exchange provides a market for buying and selling financial securities. ...
Over-the-counter trading is the trading of financial instruments such as stocks directly between parties and not through an exchange. ...
Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ...
The fundamental nature of a derivative is that unlike a bond, as in a Treasury bond, or a stock, or even physical stock or commodity (ie: some raw material, product), a derivative has no physicalistic purpose or reason for existence. Dutch East India Company bond, issued in 1623. ...
Treasury Securities are bonds issued by the U.S. Treasury. ...
A stock, also referred to as a share, is commonly a share of ownership in a corporation. ...
Cash flow The payments between the parties may be determined by: - the price of some other, independently traded asset in the future (e.g., a common stock);
- the level of an independently determined index (e.g., a stock index or heating-degree-days);
- the occurrence of some well-specified event (e.g., a company defaulting);
- an interest rate;
- an exchange rate;
- or some other factor.
Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money or the derivative becomes worthless. Depending on the terms of the contract, the potential gain or loss on a derivative can be much higher than if they had traded the underlying security or commodity directly. Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...
A stock market index is a listing of stocks, and a statistic reflecting the composite value of its components. ...
In finance, default is what occurs when a party is unwilling or unable to pay their debt obligations. ...
An interest rate is the rental price of money. ...
Types of derivatives Common examples of derivatives are: (with the notional amount on open OTC contracts in Dec 2003 according to the BIS in $ billions) ([1]) Open interest is the number of open contracts of derivatives like futures and options that have a time limit after which they expire. ...
By underlying security: A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ...
los instrumentos en los cuales FRAs es antes de que entendamos FRAs, debemos examinar los instrumentos en los cuales se basan: - un mercado internacional grande à existe muchos depósitos (con diferentes medidas de tiempo) publicados por los grandes bancos en diferentes corrientes. ...
A forward-starting swap is a forward security which lock in the rate today for an interest rate swap asset or liability to be created or sold in the future. ...
A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time, that has been standardised for a wide range of uses. ...
In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) on or before a future date (the exercise date). ...
In finance, a default option or credit default option is a put option that makes a payoff in the event the issuer of a specified reference asset defaults. ...
An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. ...
In finance, a foreign exchange option (commonly shortened to just fx option) is a derivative security where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at pre-agreed exchange rate on a specified date. ...
An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. ...
Interest rate cap An interest rate cap is a series of European call options or caplets on a specified interest rate, usually the LIBOR interest rate. ...
A stock option is a specific type of option with a stock as the underlying instrument (the security that the value of the option is based on). ...
A swaption is a financial instrument granting the owner an option to enter an interest rate swap. ...
The turbo warrant is a stock option with two new features. ...
A warrant is the right — but not the obligation — to buy or sell a certain quantity of an underlying instrument at an agreed-upon price. ...
// Headline text In finance, a swap is a financial instrument--a kind of derivative security. ...
A basis swap is an interest rate swap which involving exchange of two floating rate financial instruments denominated in the same currency. ...
An equity swap, a branch of derivative security, is a swap in which at least one party pays the return on a stock or stock index. ...
The credit default swap (CDS) is the most widely used credit derivative. ...
Currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after specified period of time, to give back the original amounts swapped. ...
In the field of derivatives trading, a popular form of swap is the interest rate swap, in which one party exchanges a stream of interest for another stream. ...
Total return swap, or total rate of return swap, or TRORS, a contract in which one party receives interest payments on a reference asset plus any capital gains and losses over the payment period, while the other receives a specified fixed or floating cash flow unrelated to the credit worthiness...
Some less common examples are: Equity derivatives are financial derivative products whose value is dependent on the value of an underlying share or group of shares. ...
An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. ...
A Credit Derivative is a contract to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ...
United States Economics indicators that are reported by US government agencies. ...
A Freight derivative is a financial instrument for trading in future levels of freight rates, primarily for dry bulk carriers and tankers. ...
Weather derivatives are financial instruments that can be used by organisations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions. ...
Glossary From: Quarterly Derivatives Fact Sheet - Bilateral Netting: A legally enforceable arrangement between a bank and a counterparty that creates a single legal obligation covering all included individual contracts. This means that a bank’s obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement.
- Credit Derivative: A contract which transfers credit risk from a protection buyer to a credit protection seller. Credit derivative products can take many forms, such as credit default options, credit limited notes and total return swaps.
- Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof.
- Exchange-Traded Derivative Contracts: Standardized derivative contracts (e.g. futures and options) that are transacted on an organized exchange.
- Gross Negative Fair Value: The sum total of the fair values of contracts where the bank owes money to its counterparties, without taking into account netting. This represents the maximum losses the bank’s counterparties would incur if the bank defaults and there is no netting of contracts, and no bank collateral was held by the counterparties.
- Gross Positive Fair Value: The sum total of the fair values of contracts where the bank is owed money by its counterparties, without taking into account netting. This represents the maximum losses a bank could incur if all its counterparties default and there is no netting of contracts, and the bank holds no counterparty collateral.
- High-Risk Mortgage Securities: Securities where the price or expected average life is highly sensitive to interest rate changes, as determined by the FFIEC policy statement on high-risk mortgage securities.
- Notional Amount: The nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional.
- Over-the-Counter Derivative Contracts: Privately negotiated derivative contracts that are transacted off organized exchanges.
- Structured Notes: Non-mortgage-backed debt securities, whose cash flow characteristics depend on one or more indices and/or have embedded forwards or options.
- Total Risk-Based Capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholders equity, perpetual preferred shareholders equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a bank’s allowance for loan and lease losses.
A Credit Derivative is a contract (derivative security) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ...
Credit risk is the risk of loss due to a counterparty defaulting on a contract, or more generally the risk of loss due to some credit event. Traditionally this applied to bonds where debt holders were concerned that the counterparty to whom theyve made a loan might default on...
A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time, that has been standardised for a wide range of uses. ...
In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) at future date (the exercise date), and the writer (seller) has the obligation to honour the specified feature of the contract. ...
Banks and depository institutions are regulated by governments to disclose and handle their capital in a certain way. ...
Tier 1 can refer to: Tier 1 capital (see capital requirements) Tier 1 carrier This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...
In accounting, retained earnings are profits that were not paid to a companys shareholders as dividends. ...
Subordinated debt, also known as junior debt, is a finance term to describe debt that is unsecured or has a lesser priority than that of an additional debt claim on the same asset. ...
A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ...
Valuation The central topic of financial mathematics is the fair valuation of derivatives. Whereas "fair" refers to the absence of arbitrage, meaning that no riskless profits can be made by trading in assets. A key equation is the Black-Scholes formula, that made it possible to replicate a stock option by a continuous buying and selling strategy in the plain stock. Crucial to the valuation of derivatives is also the stochastics of the underlying assets, typically expressed as a stochastic process. Financial mathematics is the branch of applied mathematics concerned with the financial markets. ...
In economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. ...
The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ...
In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) on or before a future date (the exercise date). ...
Stochastic, from the Greek stochos or goal, means of, relating to, or characterized by conjecture; conjectural; random. ...
In the mathematics of probability, a stochastic process can be thought of as a random function. ...
BIS survey The Swiss BIS bank i their Regular OTC Derivatives Market Statistics from 6 December 2004 that, in the middle of 2004, notional amounts on outstanding Over The Counter (OTC) contracts had a notional amount of $220.058 trillion with a gross market value of $6.394 trillion. December 6 is the 340th day (341st on leap years) of the year in the Gregorian calendar. ...
2004 is a leap year starting on Thursday of the Gregorian calendar. ...
Usages One use of derivative securities is as a tool to transfer risk. For example, farmers can sell futures contracts on a crop to a speculator before the harvest. The farmer offloads (or hedges) the risk that the price will rise or fall, and the speculator accepts the risk with the possibility of a large reward. The farmer knows for certain the revenue he will get for the crop that he will grow; the speculator will make a profit if the price rises, but also risks making a loss if the price falls. Risk is the potential harm that may arise from some present process or from some future event. ...
A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time, that has been standardised for a wide range of uses. ...
There are other meanings of the word hedge. ...
Of course, speculators may trade with other speculators as well as with hedgers. In most financial derivatives markets, the value of speculative trading is far higher than the value of true hedge trading. As well as outright speculation, derivatives traders may also look for arbitrage opportunities between different derivatives on identical or closely related underlying securities. In economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. ...
Other uses of derivatives are to gain an economic exposure to an underlying security in situations where direct ownership of the underlying is too costly or is prohibited by legal or regulatory restrictions, or to create a synthetic short position. In finance, short selling is selling something that one does not (yet) own. ...
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 index futures. Through a combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events, Leeson incurred a 1.3 billion dollar loss that bankrupted the centuries old financial institution. 1995 was a common year starting on Sunday of the Gregorian calendar. ...
Nick Leeson (born February 25, 1967) is an English investments trader whose actions caused the collapse of Barings Bank, the United Kingdoms oldest investment banking firm. ...
Barings Bank, previously known as Baring Brothers & Co. ...
The word billion, and its equivalents in other languages, refer to one of two different numbers. ...
DARPA also examined the idea of developing a futures market for world events, the Policy Analysis Market, noting that futures markets are unusually efficient at gathering and processing information. The idea was halted due to political uproar. The Defense Advanced Research Projects Agency (DARPA) is an agency of the United States Department of Defense responsible for the development of new technology for use by the military. ...
The Policy Analysis Market (PAM) was a proposed futures exchange developed by the United States Defense Advanced Research Projects Agency and based on an idea first proposed by Net Exchange[1], a San Diego research firm specializing in the development of online markets. ...
General Electric This company uses derivatives to "match funding" (GE webcast on derivatives) to mitigate interest rate and currency risk, to lock in material cost. It's 100% for planning purposes, not to earn money, so it's not a hedge fund. 90% of all derivatives revenue made by derivatives sellers is for this kind of cost, cash, accounts receivable and accounts payable planning. Accounts receivable is one of a series of accounting transactions dealing with the billing of customers which owe money to a person, company or organization for goods and services that have been provided to the customer. ...
Accounts payable is one of a series of accounting transactions covering payments to suppliers owed money for goods and services. ...
On 05/06-2005 the company restated earnings with as much as $0.05 quarterly EPS (over 10%) in Q3 2003 (Revised 2004 10K (PDF, 787 KB)).
Opinions Although there have been instances of massive losses, most notably by Long-Term Capital Management, these have not had repercussions. Federal Reserve Board chairman Alan Greenspan commented in 2003 that he believed that the use of derivatives has softened the impact of the economic downturn at the beginning of the 21st century. Long-Term Capital Management was a hedge fund company founded by John Meriwether (a former bond trader at Salomon Brothers bank) in 1994 and with Nobel Prize winners Myron Scholes and Robert Merton on the board. ...
The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central bank of the United States. ...
Alan Greenspan ( older image) Dr. Alan Greenspan, KBE, Ph. ...
A recession is usually defined in macroeconomics as a fall of a countrys Gross National Product in two successive quarters. ...
In calendars based on the Christian Era or Common Era, such as the Gregorian calendar, the 21st century is the current century, as of this writing. ...
Because derivative securities offer the possibility of large rewards, many individuals have the strong desire to invest in derivative securities. Most financial planners caution against this, pointing out that an investor in derivative securities often assumes a great deal of risk, and therefore investments in derivatives must be made with caution, especially for the small investor ([3]). One should keep in mind that one purpose of derivatives is as a form of insurance, to move risk from someone who cannot afford a major loss to someone who could absorb the loss, or is able to hedge against the risk by buying some other derivative. Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. ...
Economists generally believe that derivatives have a positive impact on the economic system by allowing the buying and selling of risk. However, many economists are worried that derivatives may cause an economic crisis at some point in the future. Since someone loses money while someone else gains money with a derivative security, under normal circumstances, trading in derivatives should not adversely affect the economic system. An economist is someone who studies Economics. ...
An economic system is a mechanism which deals with the production, distribution and consumption of goods and services in a particular society. ...
There is the danger, however, that someone would lose so much money that they would be unable to pay for their losses. This might cause chain reactions which could create an economic crisis. In 2002, legendary investor Warren Buffett commented in an interview with the New York Times that he had accumulated his wealth without the use of derivatives and that he regarded them as 'financial weapons of mass destruction', an allusion to the phrase 'weapons of mass destruction' relating to physical weapons which had wide currency at the time. 2002 is a common year starting on Tuesday of the Gregorian calendar. ...
Warren Edward Buffett Warren Edward Buffett (born August 30, 1930) is a wealthy American investor and businessman. ...
The New York Times is an internationally known daily newspaper published in New York City and distributed in the United States and many other nations worldwide. ...
Weapons of mass destruction (WMD) generally include nuclear, biological, chemical and, increasingly, radiological weapons. ...
See also A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ...
Financial engineering is the process of employing mathematical finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions. ...
Financial mathematics is the branch of applied mathematics concerned with the financial markets. ...
In economics, the Herfindahl index is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. ...
Associations International Swaps & Derivatives Association is a trade association, headquartered in New York, that represents participants in the privately-negotiated derivative securities industry. ...
Lists What follows is a list of over 250 Wikipedia articles on finance topics. ...
External links
Associations
Risk - Quantnotes.com - introductory articles covering mathematical finance
- Riskglossary.com - an online glossary, encyclopedia, and resource locator
- Option Tutor - a visual presentation of modern option pricing theory
- Riskworx.com - discussion of the application and theory of derivatives
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