Fundamentals of Futures - Introduction to Derivatives RSS Feed

What Is a Derivative?

CME Group — Mon, 22 Sep 2008 10:14:00 EST

A derivative is a financial agreement that has a value determined by the price of an asset with its own inherent valuation such as a currency or equity index. The main types of derivatives are futures, forwards, swaps and options. Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market: exchange traded and over-the-counter (OTC).

1.Value of derivative closely link to value of underlying asset
2.Derivatives do not include ownership of the asset
3.Stocks differ from derivatives since they represent ownership

Role of Financial Markets

CME Group — Mon, 22 Sep 2008 10:05:00 EST

Financial markets, and the financial systems they support, are vital for the economic growth and stability of the world economy by providing:

1.Means for consumers and businesses to save for the future
2.Opportunities to protect and hedge against risks
3.Access to funding for consumption or new investment opportunities

Differences Among OTC Derivatives, Futures and Securities

CME Group — Mon, 22 Sep 2008 10:00:00 EST

There are differences in the make up and execution of OTC derivatives, exchange-traded futures and securities. These distinctions are:

1.Product structure
2.Regulation
3.Market structure
4.Trade clearing and risk

How Derivatives Are Used

CME Group — Mon, 22 Sep 2008 09:55:00 EST

Derivatives provide an alternative to simply purchasing a commodity or financial instrument, expanding the range of opportunities and tools available for investors and managers. They are often a less expensive, more efficient tool for:

1. Risk management through hedging
2. Speculation and arbitrage
3. Increasing portfolio returns

Buying Long and Selling Short

CME Group — Mon, 22 Sep 2008 09:50:00 EST

Traders take either a long or short position depending on their expectations of the future price of an asset:

1.Buying long = Bullish = expect price to increase in the future
2.Selling short = Bearish = expect price to decrease in the future

Types of Futures Contract

CME Group — Mon, 22 Sep 2008 09:45:00 EST

There are many different kinds of futures contracts, reflecting the many different kinds of tradeable assets of which they are derivatives. For a list of tradeable commodities futures contracts, see:

1.Foreign exchange market
2.Money market
3.Bond market
4.Equity index market
5.Soft commodities market