Product details

Derivatives are contracts which give one party a claim on an underlying asset (derived from the cash value of an underlying asset) at some point in the future, and bind a counter-party to meet a corresponding liability. The contract might describe an amount of currency, a security, a physical commodity, a stream of payments, or a market index. It might bind both parties equally, or offer one party an option to exercise it or not. It might provide for assets or obligations to be swapped. It might be a bespoke derivative combining several elements. Whether derivatives are or are not traded on exchanges, their market price will depend in part on the movement of the price of the underlying asset since the contract was created. The rapid growth of derivatives trading around the world in recent years has been propelled by the internationalisation of capital markets in general, by technological advances in computers and telecommunications, and by the increasingly fierce competition among big banks and securities houses to devise and sell products. This note describes the basic ideas underlying all derivatives contracts. It has been written for readers who may have found the existing literature mathematically demanding and are seeking a more accessible discussion of the issues.