Derivatives are securities, namely derivatives financial instruments, giving the right to perform certain actions with the assets that underlie them and are called basic, both in the present and in the future.

A broad definition that needs clarification:

A derivative financial instrument does not mean the asset itself (for example, a commodity) that underlies such a contract, but only the right to perform actions with this asset. This is one of the fundamental differences between the spot market and the derivatives market: in the spot market, if you bought a share, then you “have a thing” - the share can be sold, it can be donated and even pledged in a bank, receiving money for it ( REPO transactions).

But derivatives (although these contracts cost a lot of money) from the point of view of property are ... don’t understand what. Until the contract for the supply of goods is executed, no property under this contract can actually be “recovered” (and such contracts have a validity period of 3, 6, less often - 9 months). Theoretically, the only thing that can be done with this contract, while it is in the hands of the investor and its validity period has not expired, is to monetize it again, that is, simply sell it, having received (in theory) for it what was once in it is invested.

What actions can be performed with the underlying assets under a derivative contract? Obviously, either deliver or accept (that is, buy). In other words, buying a derivative contract means acquiring the right to supply or purchase the underlying asset. It may seem that, for example, the acquisition of a derivative contract and the acquisition of the asset itself are “two big differences”. However, it is not. It's just that derivatives mean spreading the payment and delivery of the underlying asset in time (for the same 3, 6, less often - 9 months).

For example, the acquisition of a contract for the supply of some product in the future actually means the sale of this product. And the sale of the right to purchase it ... is also its sale!

The essence of derivatives

The formulation of the fact of separation in time of delivery and payment is of key importance for understanding the essence of derivatives. As confusing as the definition may sound, at their core derivatives contracts are simply prepaid transactions. And from this already follow various opportunities for buyers and sellers. Eg:

• Delivery of the underlying asset under this contract must take place without fail.
• Or one of the parties, determined in advance, gets the opportunity to refuse its execution if economic conditions for this party do not seem to be beneficial.

Amazing, isn't it? Who might need a contract for the supply of something in at least 3 months, but at the current price, and even despite the fact that one of the participants in the transaction may refuse it? However, the demand for precisely such conditions of derivative contracts is clearly demonstrated in the following example.:

Let's say subject "A" assumes that the cotton currently worth $100 is undervalued, and logically it should be worth more. The rational economic behavior of speculator "A" would be to buy some amount of this "white gold", in accordance with own forecast, wait until the cotton market rises, and then sell it at a profit. But "A" wants to play it safe: he is looking for a cotton seller - subject "B", with whom he negotiates a price and formulates the following conditions: let me give you an advance payment, 10 percent, so that you can deliver cotton to me in 3 months. At the same time, he (subject "A") reserves the right to refuse to pay extra and pick up cotton if for some reason it becomes unprofitable for him, however, the prepayment made in any case to subject "A" from "B ' is no longer coming back.

It is beneficial for the subject "B": he receives a guaranteed advance payment, and if "A" refuses to take the goods that he "fits" him in 3 months, well, it's up to you, mister buyer, I will sell it to another! What is the result?

Suppose the forecast on which the whole “combination” was based was justified and cotton rose in price to $200 in 3 months. In this case, "A" in good conscience pays "B" the remaining $90 (90% after the initial 10% prepayment) and for the resulting $100 takes the goods, which already costs $200.

But if suddenly the forecast does not come true and the cost of cotton drops to $40. In this case, it is more profitable for “A” to completely refuse to pay extra under the contract. After all, if he pays $90 extra, he will receive (as a result, for the same $100) a product that costs $40 - the loss will be as much as $60! And if he refuses to complete the transaction, he will lose only an advance payment - $ 10.

Subject "A" initially purchased cotton in order to greedily cash in on the growth of its market (exchange) value. Therefore, he invented such "interesting" terms of delivery and settlements, where the decision to complete the transaction remains with the buyer. But why should a cotton supplier agree to this? Does he really not understand that if he stays with cheaper cotton, he will lose exactly what he is afraid of losing "A"?

Yes, he understands everything. Simply, according to the terms of the derivative contract (and this is exactly what it is), the holder of this contract (its buyer) has the right to decide on the completion of the transaction. Reiter (his seller) has only one delivery obligation. But nothing prevents “B” from acting as a buyer of the obligation to supply cotton under another contract and independently deciding whether it makes sense to make a delivery.

Types of derivatives

The main examples of derivatives (that is, contracts, transactions, delivery and payment for which are spaced apart for certain periods of time) are:

• Futures contracts;
• Options;
• forward contracts.

How are they different? The example in the previous section is a typical option.

Option is a security that gives the right (but not the obligation) to its acquirer to carry out a transaction with the underlying asset after a specified standard period of time, but at the price at the time of purchasing the option (strike price).

If it is impossible not to complete the transaction, then in this case we are talking about futures.

Futures is a security that obliges its purchaser to carry out a transaction with the underlying asset after a specified standard period of time, but at the price at the time of purchasing the option (at the strike price).

And here the aspirations of trade participants are somewhat modified. If the contract cannot be abandoned, then if there is no particular desire to deliver on it, you need to either sell it or compensate by buying exactly the same, only not for the purchase (if you have an obligation to buy), but for the sale. And this somewhat intensifies futures trading.

Both futures and options are standard securities that rotate on organized markets (currency, stock exchanges). Issues of shares and bonds are made by specific legal entities- financial market participants. But options with futures can be issued... by anyone who wants to take on the right/obligation to deliver or purchase the underlying asset.

If the underlying asset- shares, then its popularity and attractiveness from the point of view of market participants is determined precisely by the value of turnover under derivative contracts, the volume of which in the complex characterizes the reliability and liquidity of the issuer of securities, that is, the legal entity itself.

Here are the forward contracts- these are less standard, non-exchange contracts, which, however, have all the same qualities and characteristics as market options. As a rule, forward contracts are concluded if the participants want to prescribe some additional conditions in them, and in addition, if their amount significantly exceeds the “market standard” (100 thousand units of the underlying asset).

Conclusion or what are the main functions of derivatives

Both main functions of derivative contracts are seen in the above example:

Risk hedging

Hedge is insurance. But only, not in terms of contacting the services of a professional insurer (an insurance company with a policy issuing), but, in essence. That is, the transaction mechanism itself insures its parties (or only one of the parties) against increased losses. In the example given, it was the buyer of cotton - the subject "A". But subject “B” could easily become this if he buys an option for the right to supply from someone. Only then will he refuse the transaction if the price rises, since the price drop is beneficial for the supplier.

Speculation

Futures here simply have no equal. A pledge or prepayment under a contract (filling), in fact, forms a leverage - a multiplier that increases the scale financial result changes in the market value of an asset. After all, if the price changes, then not only for the prepaid part, but for the rest of the contract too. And this quality makes futures an excellent tool for the implementation trading strategies Literally, "high stakes".

So, derivatives: what is it in simple words? Perhaps a compact combination of the first and second: so that those crayfish that were yesterday and 5 each could be bought tomorrow, and paid today for 3 ...

Greetings to regular readers and first-time visitors!

Derivatives is a collective name for a whole group of financial instruments. The textbooks go straight to the details and actually build a house without a foundation. But it is enough to understand the principle of work in order to use derivative transactions with a profit.

A derivative is an auxiliary financial instrument, an agreement on an event that will occur in the future.

The main financial instrument: buying and selling. If an investor buys securities, invests in gold coins, real estate, the transaction takes place today. And there is the end result (a stack of stocks, a stack of coins and a chic hotel).

When you need to get a guarantee of a sale or purchase in the future, or the right to buy in the future at a certain price, the result will also be later. I want to buy horse harness. The master has a turn for six months ahead. We sign an agreement that he will sell the saddle at a fixed price in six months.

I will receive the goods in the future, but I already have a derivative (guarantee).

Features and functions

How not to get confused whether the deal is a derivative or not? Its features:

1. There is a basic basis for the transaction (material values).
2. The sale and purchase will take place at the agreed time in the future.
3. A small investment (guarantee fee) may be required.

The main function of derivatives is insurance (hedging), protection against future risks of not selling a product or not buying it at an attractive price.

And this is an opportunity to earn! Financial speculation in derivatives (not with the aim of buying a product later, but finding someone who wants it and selling him a contract now) has formed a separate market.

Examples

We regularly encounter derivatives without even knowing it. In the store, I ask you to postpone the item you like for a day, the seller agrees not to sell the goods until the evening and not to change the price. Both are happy. I will definitely buy, he is guaranteed to receive money.

If the cost of the goods is high, I make a deposit (apartment, car). This is also a derivative transaction: the actual purchase will take place in the future, but there is an agreement on it now.

In business, the scale of prices is greater, but the principle itself does not change. IN agriculture the farmer plans the crops to plant with the sale in mind. At the end of winter - beginning of spring, he concludes an agreement on the supply of crops at a price that he considers profitable, and can work calmly.

A representative of a supermarket chain worries about a large batch in advance in order to gain a competitive advantage, and in the end he knows exactly what will be provided with the same carrot-cabbage.

Kinds

The last 25 years on financial market derivative transactions show the growth of quotations. The most popular types:

1. Options are financial instruments that give the right to buy or sell an asset for a certain price at a predetermined time. An option in our life: after purchasing a product, the owner has the right to buy a second item at a discount until the end of the promotion. Whether he buys or ignores the offer, who knows.
2. Futures - contractual obligations (contract), where one party buys and the other sells at a specified price in the future (but the goods are not yet available). Example: production contract (batch for a specific buyer).
3. Swaps are transactions delayed in time for both buying and selling at the same time. In fact, the prolongation of the contract: the year ended, the contract was extended on the same terms. Currency swaps are used on the exchange. Open trade for currency pair at the end of the day, it closes and opens again (transfer of the transaction through the night).
4. Forwards are derivative transactions similar to futures, but the forward cannot be cancelled.

They also use interest, credit derivatives, as well as insurance, weather, energy.

Derivative Terms

Derivatives necessarily fix the price and execution time in the future. Everything else, including the terms of termination, depends on the type of derivative financial instrument.

Advantages and disadvantages of using

The popularity of derivatives transactions is growing with the improvement of the investment climate. Forward contracts have become commonplace when buying housing in a new building at the construction stage. Main advantages:

1. Receipt Guarantee material assets in future.
2. The risks of a double sale, non-completion of settlements are minimized.
3. Simplified accounting and tax accounting.

But pitfalls, like any financial instrument, are present:

1. There is no single set of rules. Legislation different countries regulates derivatives trading differently.
2. In international contracts, fluctuations in exchange rates increase the risk of derivative transactions.
3. Many factors affecting the price are completely unpredictable ( weather, public policy, strike, etc.)

Conclusion

Knowing the principle of the derivative, it is easy to understand how its types work and where the financier's profit comes from. It turns out there is nothing to worry about.

That's all for today. If you want to become a cool investor, subscribe to articles and like it. Good luck in the wilds of finance!

If you are interested in investing in last years, then, of course, you have already heard the concept of "derivative".

There are a lot of rumors and gossip around derivatives. It is believed that CDO were one of the causes of the current crisis. Many experts believe that the remaining derivatives, the market for which continues to grow, could finally destroy the American banking system.

What are these very derivatives and are they as scary as economists commonly believe.

For the simplest definition of a derivative, we can say that it's a tool, whose valuation depends on the value of another instrument, which is then called the underlying asset. This underlying asset can be stocks, bonds, government securities, commodities, currencies, etc. Thus, the price of the contract is affected by the price of the asset.

Essence

The parties trading the derivative actually discuss the terms of the contract which will determine the cash flows arising from the transaction based primarily on changes in the value of the underlying asset(s).

underlying asset not physically traded. This exchange may be optional (in the case of ), deferred (futures or forward contracts), or never take place (interest rate swaps).

Derivative financial instruments are available for all classes of market assets and related risks: interest rate risk, currency risk, capital risk, commodity risk and credit risk.

Because the derivative corresponds to the bank's obligation, it is carried at notional cost as an off-balance sheet item. However, any gain or loss resulting from a change in the market value of a contract is recognized in the balance sheet, as are, of course, the cash flows generated by the contract when they become effective.

Usage

All derivatives can be used in one of three contexts: hedging, speculation and arbitrage.

1. Hedging‒ an entity that owns or intends to acquire an underlying instrument may take a position in a derivative instrument to hedge against price fluctuations basic tool. This strategy limits losses incurred in the event of adverse price fluctuations, but in turn, as a rule, implies the rejection of some of the potential benefits of owning the underlying asset, somewhat along the same lines as insurance.
2. Speculation‒ an entity that expects a change in the price of the underlying asset may take a position on a derivative instrument. Derivatives usually allow you to take a position for a large notional amount, but with a relatively low initial investment. This is called leverage. In this case, profit prospects are important if the strategy is successful, but losses can be just as important.
3. Arbitration‒ the subject detects a discrepancy between market value derivative instrument and its underlying value. It then simultaneously takes positions in the spot market of the underlying asset and the derivative. This type of strategy allows minimum profit per trade, but without risk. It must be carried out systematically in order to obtain significant profits.

Arbitrage has a positive effect on the markets by removing inconsistencies, making the price discovery process more efficient. Speculation brings liquidity to the markets and thus makes it easier for hedgers to find a counterparty to hedge against.

Example

Let's see how derivatives are used with a simple practical example.

Consider weather, which is very difficult to predict with great accuracy. Farmers in the Moscow region are hedging their exposure to bad weather that could destroy crops.

So if the weather turns out to be excellent, and their harvest is unprecedented, then the farmer will be in maximum benefit. Think of it like insurance policy, and this means that hedging actually insures against risk on the asset.

Classification

The main types of derivatives are futures, options, forwards and swaps.

Futures is an agreement between two parties to sell an asset in the future at a price already agreed upon.

Forward contracts are similar to futures, the only difference is that they are not traded on an exchange.

An option contract provides the buyer with the option, but not the obligation, to buy/sell the contract at a predetermined date.

Swaps These are contracts in which two parties exchange financial instruments.

These are the most common types of derivatives.

The impact of derivatives is quite large on the economy. A group of derivatives developers regularly works in close cooperation with global banking, corporate, derivatives and litigation, energy, investments, pensions, real estate, regulation and tax practice on the most important transactions and legal issues of the market.

Close contacts with regulators worldwide enable the development team to advise on regulatory issues (including regulatory capital) arising from the structuring and marketing of derivative products, regardless of the legal form of those products.

Which, as they say, arise from other financial instruments, being their derivatives.

A derivative is an obligation to perform a certain action with respect to the so-called underlying asset (which in turn can be any other financial instrument or any commodity). For example, it may be an obligation to buy a certain amount of goods at a specified time at a certain price. Or an obligation to sell a certain number of shares after a certain period of time.

A derivative is a security with all the ensuing consequences. It can be bought and sold in the same way at a price that, although related to the price of the underlying asset, is far from always equal to it. As a rule, derivatives are used for risks on the corresponding underlying assets, or for purely speculative purposes.

Buyers of derivatives usually do not aim for the actual delivery of the underlying asset, but use them either as a tool to hedge their risks or to gain a price difference. Therefore, the amount of liabilities on derivatives may exceed the actual amount of the underlying asset.

Examples of underlying assets: stocks, interest rates, currencies, etc.
Examples of derivatives: options, futures, currency swaps, CFDs, etc.

Main features and characteristics of derivatives

1. The value of the derivative always follows the price of the underlying asset, but it is not always equal to it (which can be used in arbitrage strategies). The derivatives market is generally closely related to the stock and commodity markets. They operate on the same principles and, in most cases, are traded by the same people;
2. Derivatives are traded on the so-called futures market using leverage (margin trading). This makes it possible to trade them using relatively little trading capital (compared, for example, with the capital required to trade the underlying assets embedded in them);
3. The underlying asset for a derivative can be not only stocks, bonds or commodities, but also other derivative financial instruments. In this case, we have what is called a derivative on a derivative;
4. In most cases, trading in derivatives is speculative or used as a hedge for transactions made with their underlying assets.

Brief historical background

We owe the first historically reliable information about the use of some analogues of modern derivatives to Ancient Babylon. It is known for certain that the Babylonian merchants, equipping their caravans on a long journey, concluded an agreement on the division of risk. Under this agreement, they received a loan with the condition of repayment in the event of successful delivery of goods. Naturally, the interest on this loan was significantly higher than the market average, but in this way the default option was covered (in case of loss of goods).

Babylonian merchants

The Middle Ages in Europe and Asia also bear evidence of the use of prototypes of today's derivatives. A document appeared at the fairs lettre de faire, which was, in fact, an obligation to deliver goods after a specific period (the predecessor of the modern forward contract). Also known are forward contracts for the supply of tulip bulbs during the period of the so-called tulip mania that swept Europe in the late 1630s.

Around the same time, rice coupons appeared in Japan, which were nothing more than an obligation to deliver a certain amount of rice at a given time. Japanese landowners exchanged these coupons with rice sellers for real money, which allowed them to fully prepare for the next harvest. And the sellers, in turn, provided themselves with a guaranteed stock for future trading.

And finally, the 19th century was marked by the emergence of derivatives in almost the same form that we are used to today. In 1830, PUT and CALL options were already in full swing on the London Stock Exchange. And in the US, the first futures contracts appeared in 1865, they were traded at the Chicago Board of Trade and were tied to the supply of grain.

Credit derivative

Derivative financial instruments based on assets in the form of issued loans or debt securities (bonds, mortgages, bills, etc.) are commonly called credit derivatives. Mainly used by banks, their essence boils down to the fact that they make it possible to shift their credit risks on the shoulders of other investors, and in addition to significantly increase the liquidity of their assets.

Investors invest their money, of course, not to help the bank diversify its risks. They use credit derivatives to hedge their own risks and/or expect to profit from speculative transactions with them. The cost of such securities directly depends on changes in the base interest rate (see key interest rate).

Currently, the following types of credit derivatives are widely used:

• FRA(forward rate agreement) - agreements on the future interest rate. With their help, the parties to the contract fix a certain interest rate(on a future loan or deposit) on a specific date;
• IRS(interest rate swap) – interest rate swaps. They are a contract, the parties to which exchange interest payments for a certain amount during the entire period of its validity;
• IRF(interest rate future) – interest rate futures. These are futures contracts based on the future interest rate;
• interest rate options;
• Options on interest rate futures. According to the terms of these contracts, one of the parties receives the right to redeem (or sell) the agreed interest rate futures on a predetermined date and at a predetermined price;
• Options on an agreement on a future interest rate;
• Swap options. These are contracts under the terms of which one of the parties receives the right to buy back (or sell) a specified interest rate swap (IRS) on a certain date at a predetermined price.

Today, investors have a fairly wide range of financial instruments and opportunities at their disposal, how to make money on stocks and valuable papers oh, and on derivative instruments - derivatives (derivative).

The derivatives market is one of the main and most active segments of the modern financial system. However, most novice investors have a very poor idea of ​​what derivatives are. Accordingly, the opportunities that open up to the investor thanks to such tools remain unclaimed. Or vice versa, investors take an ill-considered risk, having a bad idea of ​​the risks of this instrument.

The essence of the derivative as a financial instrument

To understand what derivatives are and why they are needed, first of all, you need to understand what they are, if in simple words, derivative financial instruments. That is, there is an asset that is considered the underlying one. According to it, a bilateral agreement is concluded, the participants of which undertake to make a deal on predetermined conditions.

Despite the complexity of the wording, such contracts are often found in our everyday life. By the way, the simplest example is the purchase of a car in a car dealership according to the "made to order" scheme. In this case, the buyer enters into dealer center an agreement for the supply of a car of a specific model, in a specific configuration and at a specific fixed price.

Such a contract is an elementary derivative, in which the ordered car acts as an asset. Thanks to the concluded contract, the buyer is protected from changes in value, which may increase by the agreed date of purchase. The seller also receives certain guarantees - a car of a rare configuration, which he purchases from the manufacturer, will definitely be bought and will not “hang” in his cabin as a “dead weight”.

The modern system of derivatives began to take shape in the 30s of the 19th century. Financial derivatives are a product of the 20th century. The starting point is considered to be 1972, when that international currency market that we know today. If before that only real goods were used in such transactions, then with the advent and development of financial derivatives it became possible to conclude contracts in relation to currencies, securities and other financial instruments, up to the debt obligations of individual companies and entire states.

The Russian derivatives market was formed in the 90s of the last century. Despite the fact that this segment is actively developing, it is characterized by the problems of all young markets. main feature- lack of competent personnel, especially among ordinary market players. Not all participants reliably know what derivatives are and their properties. All this affects the development of the market.

Types of derivatives

Classification helps to fully understand what a derivative is and why it is needed. It can be built on two main features. First, it is the type of the underlying asset:

1. Real commodities: gold, oil, wheat, etc.
2. Securities: stocks, bonds, bills and more.
3. Currency.
4. Indexes.
5. Statistical data, for example, key rates, inflation rate, etc.

The second classifying feature is the type of pending transaction. From this point of view, there are 4 main varieties:

1. forward.
2. Futures.
3. Optional.
4. Swap.

A forward contract is a transaction in which the participants agree on the delivery of an asset of a certain quality and in a specific quantity within a specified period. The underlying asset in forward contracts is real commodities, the exchange rate of which is negotiated in advance. The car dealership example above falls into this category. This example really captures the essence plain language without smart words.

Futures - an agreement under which a transaction must take place at a specific point in time at the market price on the date of execution of the contract. That is, if with a forward contract the cost is fixed, then in the case of a futures contract, it can change depending on market conditions. A prerequisite futures contracts is only that the commodity will be sold/bought at a particular point in time.

An option is the right, but not the obligation, to purchase or sell an asset at a fixed price before a specific date. That is, if the holder of shares of a certain enterprise announces his desire to sell them at a certain price, then a person interested in buying can enter into an option contact with the seller. Under its condition, the potential buyer transfers a certain amount of money to the seller, and the latter undertakes to sell the shares to the buyer at a set price.

However, such obligations of the seller remain valid only until the expiration of the period specified in the contract. If by the specified date the buyer has not made a deal, then the premium paid by him goes to the seller, who gets the right to sell the shares to anyone.

Swap - double financial transaction, within which the purchase and sale of the underlying asset are made simultaneously on different conditions. At its core, a swap is a speculative instrument and the only purpose of such actions is to benefit from the difference in the price of contracts.

Why derivatives are needed

In the conditions of the modern financial system, derivatives and their properties are used in two ways. On the one hand, this is an excellent tool for hedging, that is, insurance of risks that invariably arise when concluding long-term financial obligations. However, they are most often used for speculative earnings.

How forward transactions are used has already been discussed above. This is a classic price risk hedging option. However, in the modern commodity market, futures transactions have become more widespread.

The use of futures allows the seller to insure against financial losses that may arise if the underlying asset he has is unclaimed. Having concluded futures contract, the owner of an asset can be firmly convinced that he will definitely sell it, thereby getting real money at his disposal.

For the buyer, the value of a futures contact is that he receives a guarantee for the acquisition of an asset that he needs to realize his plans. For example, manufacturing enterprise needs a stable supply of raw materials, as the shutdown of the technological cycle threatens with serious losses. Therefore, it is beneficial for management to buy a futures contract for the supply of a specific amount of raw materials by a certain date, thereby ensuring the smooth operation of the enterprise.

Options are more often used to hedge the risks that arise when trading on stock market. To understand the mechanism of their action, consider a small example. Suppose there is a block of securities that is sold at current price 100 rubles. An investor, having analyzed the prospects of the package, came to the conclusion that in the next three months its price should increase by 50% and amount to 150 rubles. However, there is a high probability of financial losses if the forecast made does not come true.

In this situation, the investor enters into an option contract with the holder of the package for a period of three months to sell the asset at a price of 100 rubles. For this right, he pays the holder of securities 10 rubles. Now, if the forecast turns out to be correct and in the near future the share price rises to 150 rubles, the investor will be able to buy a package of securities for 100 rubles at any time before the expiration of the option contract and make a profit of 50 rubles.

If, however, an error was made during the analysis and the price of the package did not increase, but, on the contrary, decreased to 60 rubles, then the option buyer has the right to refuse to purchase. In this case, he will incur a loss of 10 rubles, while in the absence of risk hedging through the option, his loss would be 40 rubles.

The owner of securities can act in a similar way by entering into options for the right to sell an asset at the current value within a certain period. The process may include third, fourth and fifth parties - the same option may be resold to other market participants who may dispose of it as an ordinary security.

Similar properties of forwards, futures and options are actively used in speculative games. In the 20th century, the market began to rapidly become saturated with derivatives. As a result, its volume exceeded the market of real goods many times over. This, according to many analysts, was the cause of the latest crisis that has engulfed the global economy. financial system at the beginning of this century.

Therefore, novice investors need to have a good idea of ​​what derivatives are and how to work with them correctly. Otherwise, the illiterate use of such tools threatens with serious losses.