Chapter 9. Financial Derivatives and Commodity Derivatives

In the next few chapters, we will look at the concept of a derivative and familiarize ourselves with two types of derivatives. So, a derivative (derivative financial instrument) is based on another financial asset. The value of the derivative is derived from the price of the underlying assets.

The underlying asset (underlying asset) of a derivative is: a bond, currency, stock, stock index or other derivative, including a portfolio of securities. Another name for these instruments is financial derivatives. In addition to financial derivatives, there are also commodity derivatives, the underlying asset of which is a certain commodity (grain, gas, etc.). The derivative has a number of features:

it is settled in the future;
the value of the derivative depends on fluctuations in the price of the underlying asset;
compared to other instruments, the initial investment to purchase a derivative is relatively small.

The main of these features is the actual “deferral” of payment and delivery of the asset (for derivatives such as forwards, options, swaps and futures). It is because of this peculiarity of derivatives that the term “derivatives market” has become so widespread on the Russian stock exchange, when an agreement is made now, but the delivery of the asset and its payment take place after a certain period of time.

Actually, a derivative is an agreement between two parties, in the form of an obligation and/or a right to purchase an asset at a predetermined time at a predetermined price.

Such types of derivative financial instruments as futures and options are most accessible to private investors, due to which they have gained great popularity. But, apart from these, there are other financial derivatives:

swap;
swaption;
interest rate swap (IRS);
currency swap;
credit derivatives;
forward;
warrant;
future interest rate agreement (FRA).

Since most of these are only available to professional exchange participants, we will only cover options and futures in detail in the following chapters.