Derivative is a term for a financial product which is based on another financial product (so-called underlying asset) from which is derived the price of the derivative. Financial derivatives always exist under the contract between the customer and the merchant.
Basic types of derivatives are:
All types of financial derivatives have the following common features:
- A financial derivative is always derived from another financial product, so-called the underlying asset (such as securities, shares, stock indices, commodities, real estate). Value of the underlying assets directly affects the value of a financial derivative.
- Settlement is always set in the future - in a pre-agreed date
- With the trading of financial derivatives is associated so-called leverage effect (for obtaining derivatives should be very low - may be zero - initial investment)
Derivatives in practice: Derivatives are mainly used for hedging and speculative trading. The speculation with financial derivatives is often associated with the financial crisis in 2008. Trading takes place on both exchanges and over the counter (OTC). Trading in financial derivatives has spread particularly in the last 30 years around the world mainly through electronic trading on the stock exchanges and settlement systems.