Derivatives
Understanding derivatives
A derivative is a contract between two parties. The value of this contract is derived from the value of some assets. This other asset is referred to as the underlying. Derivatives could be based on any of the following assets:
• Various commodities
1. Agricultural commodities like wheat, coffee, pulses, sugar, cotton, etc.
2. Metals like gold, silver, copper, etc.
3. Energy resources like crude oil, coal, natural gas, etc.
•Financial assets like stocks and bonds.
Derivatives Trading
Derivatives can be traded over the counter (OTC) or on-exchange:
- Over the counter: the terms of the contract are privately negotiated between the parties involved (a non-standardised contract). For example, a contract between a trader (like you) and a broker (like us)
- On-exchange: another way to trade derivatives is through a regulated exchange that offers standardised contracts. These are called exchange traded products (or ETPs) and they provide the benefit of having the exchange act as an intermediary. Because the exchange guarantees payment, counterparty risk is vastly reduced.
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