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Derivative Instruments
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Swaps
Private agreements between two parties to exchange cash flows or other financial instruments for a certain period. Often used to hedge interest rate risk or to exchange currencies.
Equity Derivative
A derivative whose value is based on equity movements (stocks or indexes). Examples include equity options and equity index futures.
Puttable Swap
A swap with an embedded option allowing the receiver to terminate the swap before maturity.
Binomial Options Pricing Model
A model that calculates the price of options by simulating possible price paths of the underlying asset and discounting payoffs back to present values.
Variance Swap
A financial derivative that allows investors to speculate on or hedge against the future volatility of an underlying asset.
Commodity Derivative
Derivatives whose underlying asset is a commodity like oil, gold, or agricultural products. Used by producers and consumers to hedge against price changes.
Exotic Derivative
Non-standard derivative with complex structures, often including barriers, look-back options, or Asian options, tailored for specific hedging or speculation needs.
Basket Option
An option whose underlying asset is a basket of instruments, which could be stocks, commodities, currencies, or others, providing a way to reduce risk through diversification.
Futures Contract
A standardized contract traded on an exchange to buy or sell underlying assets at a specified price with delivery set at a specified time in the future. Used for hedging and speculating.
Option
A contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified strike price before a specified date. Used for hedging, speculating, and income generation.
Barrier Option
An option whose existence depends upon the underlying asset's price reaching a preset barrier level.
Swap Option (Swaption)
An option that gives the holder the right but not the obligation to enter into a swap agreement as the floating-rate payer or receiver.
Forward Start Option
An option that starts at a future date with the strike price determined at the option's start date rather than when the contract is initiated.
Bermudan Option
An option that can be exercised only on predetermined dates within a certain timeframe, providing a middle ground between American and European options.
Credit Derivative
A financial contract that allows parties to manage exposure to credit risk, often through credit default swaps (CDS) which provide insurance against the default of a particular credit instrument.
Lookback Option
An option that allows the holder to 'look back' over time to determine the payoff, based on the maximum or minimum underlying asset's price over the life of the option.
Compound Option
An option on an option, the holder has the right to purchase another option at a certain period or specific date.
Interest Rate Derivative
Financial instruments used for hedging or speculating on changes in interest rates, including interest rate swaps, options, and futures.
Callable Swap
A swap with an embedded option allowing the payer to terminate the swap before expiry.
Black-Scholes Model
A mathematical model used to price European-style options by considering the stock price, strike price, time to expiration, risk-free rate, and volatility.
Real Estate Derivative
Derivatives where the underlying assets are related to real estate markets, such as property index swaps or futures.
Credit Default Swap (CDS)
A financial derivative that provides insurance against the risk of a debt instrument defaulting. The buyer pays a periodic fee in return for a payoff if the debt issuer defaults.
Weather Derivative
A financial instrument used to hedge against or speculate based on weather conditions and events, examples include temperature futures and weather options.
Structured Product
A pre-packaged investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuances, or foreign currencies, and to which at least one derivative is applied.
Digital Option
A type of option that pays a fixed amount if the underlying asset is above (digital call) or below (digital put) a certain level at expiry.
Asian Option
An option where the payoff depends on the average price of the underlying asset over a certain period rather than the price at maturity.
Chooser Option
An option that allows the purchaser to decide whether it is a call or put option at a certain point during the contract's life.
Greeks
Risk measures that describe how the price of a derivative changes with changes in market conditions, including delta, gamma, theta, vega, and rho.
Forward Contract
A customized contract between two parties to buy or sell an asset at a specified price on a future date. Used for hedging and speculating.
Quantity-Adjusting Option (Quanto)
A derivative with an underlying asset denominated in one currency, but which pays out in another currency at a pre-specified rate, often used to hedge currency risk.
Volatility Smile
A curve that graphs the implied volatility of options across different strike prices which typically shows higher implied volatility for deep in/out-of-the-money options.
Total Return Swap
A derivative agreement in which one party makes payments based on a set rate, while the other party makes payments based on the performance of an underlying asset.
Rainbow Option
A multi-variable option with a payoff depending on the realization of multiple correlated events or conditions, often involving a combination of underlying assets.
Payoff Diagram
A graphical representation of the potential outcomes of a derivative as the price of the underlying asset changes, often used for options to show profits and losses at expiration.
Delta Hedging
A portfolio strategy where the trader holds a position in the underlying asset to offset the delta of a derivative position, aiming to make the portfolio delta neutral.
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