What are financial derivatives? What are financial derivatives and what are them

Financial derivatives, literally understood as derivatives related to finance, usually refer to financial instruments derived from the underlying assets (in English). Its common feature is margin trading, that is, as long as a certain percentage of the margin is paid, the full transaction can be carried out, without the actual transfer of principal, and the settlement of the contract is generally carried out by means of cash price difference, and only the contract that is performed by physical delivery on the maturity date requires the buyer to pay the full payment. Therefore, financial derivatives trading has a leverage effect:

The lower the margin, the greater the leverage and the greater the risk.

As for the types of financial derivatives, there are many in the world, and due to the continuous introduction of new varieties of financial innovation activities, there are more and more things that belong to this category. From the current basic classification, there are three main classifications:

1) According to the product form, it can be divided into four categories: forwards, **, options and swaps.

2) Classification according to native assets, i.e., **, interest rates, exchange rates, and commodities. If it is further subdivided, the ** category includes specific ** (**, ** option contracts) and ** index ** and option contracts formed by ** combination; Interest rates can be divided into short-term interest rates (such as interest rates**, interest rate forwards, interest rate options, and interest rate swap contracts) represented by short-term deposit interest rates and long-term interest rates (such as bonds**, bond option contracts) represented by long-term bond interest rates. Currencies include the ratio between different currencies; The commodity category includes all kinds of bulk physical commodities.

3) According to the trading method, it can be divided into on-exchange trading and over-the-counter trading. Floor trading is commonly referred to as exchange trading, which refers to the trading method in which all supply and demand parties are concentrated on the exchange for auction trading. Over-the-counter (OTC) trading is a type of transaction in which two parties directly become counterparties, and its participants are limited to customers with high creditworthiness.

Financial derivatives, also known as financial derivatives, are financial instruments derived from native financial instruments (**, bonds, certificates of deposit, currency, etc.), and their value depends on the underlying underlying assets.

Bonds, bonds, and more.

A financial derivative is a financial contract based on an underlying financial instrument whose value depends on one or more underlying assets or indicesThe basic types of contracts include forwards, **, swaps (swaps) and options. Financial derivatives also include hybrid financial instruments with one or more of the characteristics of forwards,**, swaps (swaps) and options.

Such contracts can be standardized or non-standardized. Standardized contracts refer to the trading of the underlying asset (underlying asset), trading time, asset characteristics, trading methods, etc., which are standardized in advance, so most of these contracts are listed and traded on exchanges, such as **. A non-standardized contract is one in which the parties to the transaction agree on each of the above items and therefore have a strong degree of flexibility, such as a forward agreement.

The role of financial derivatives.

There is risk aversion,** and it is found that it is a good way to hedge the risk of assets. However, there is a good side to everything and a bad side, and someone must have taken the risk aversion, and the high leverage of derivatives is to transfer the huge risk to those who are willing to take it.

Traders can be divided into three categories: hedgers or hedgers, speculators, and arbitrageurs.

Hedgers use derivatives contracts to reduce their exposure to risk due to market changes. Speculators use these products to bet on the direction of market variables in the future. Arbitrageurs employ two or more trades that cancel each other out to lock in profits.

These three types of traders together maintain the above functions of the financial derivatives market.

1. Forward contracts and ** contracts.

It is a form of transaction in which the parties to the transaction agree to buy and sell a specific quantity and quality of assets at a specific time in the future. The contract is a standardized contract formulated by the exchange, which makes unified provisions on the expiration date of the contract and the type, quantity and quality of the assets to be traded.

2. Swap contracts.

It is a contract signed by two parties to exchange a certain asset with each other at a certain period of time in the future. More precisely, he said, a swap contract is a contract between parties to exchange cash flows that they believe to have equal economic value for a certain period of time in the future.

3. Options trading.

It is a transaction to buy and sell rights. The option contract stipulates the right to buy and sell a specific type, quantity and quality of the primary asset at a specific time and at a specific **. Options contracts are standardized on exchanges and over-the-counter.

Forwards, **, swaps (various types, with option structures), options (those who know a little bit know the structure, there are many combinations). It is used for risk hedging, speculation, optimizing the risk-return structure, achieving various trading purposes, and improving the efficiency of capital use.

1.Contract: A contract is a standardized contract that stipulates the rights and obligations to sell an underlying asset (such as a commodity, a currency, etc.) at a specific point in time in the future.

2.Option contract: An option contract is a contract that gives the buyer the right to sell an underlying asset at a specific point in time in the future, but it is not enforceable. The buyer pays a certain premium as a fee for the purchase of the option.

3.Swap contract: A swap contract is a contract that agrees to exchange a set of cash flows at a point in the future. Common swap contracts include interest rate swaps, currency swaps, ** swaps, etc.

4.Option Portfolio Strategy: An option portfolio strategy is to achieve a specific investment objective by buying or selling multiple options contracts at the same time, such as protection, arbitrage or speculation.

5.Chemical products: Chemical products are a group of financial assets packaged into a group of financial assets to transfer risks and provide investment opportunities through issuance. Common products include mortgages** (MBS), asset-backed (ABS), etc.

6.Exchange Traded (ETF): An ETF is a type of ETF that can be traded on an exchange and its value is linked to an underlying asset or index. Investors can buy ETFs to get a return on their investment in a particular market or industry.

It should be noted that financial derivatives are complex and risky, and investors should fully understand the characteristics, risks and applicability of the products before trading, and carefully assess their own investment ability and risk tolerance.