A Brief Introduction of Financial Derivatives

A financial derivative is a security that is linked to another financial security in some way. Things like stocks and bonds can be included in this category. The types and varieties of financial derivatives are quite numerous. They can be used for a variety of different purposes. Whether it be assisting in recognizing a trend in financial speculation or insuring against hedges, financial derivatives can be very useful. In this article, you will be introduced to the three main categories that derivatives generally fall under.

First off, we have the category known as options. When two parties transfer securities at specified prices, these derivatives will be placed into this category. Most often, these derivatives will be used to trade stock options. There are two subcategories that fall within the blanket of options, and those are call and put options. Put options will allow one to sell assets at a certain price within a certain time frame, while call options are the same but for buying assets.

Next, there is the futures category. The difference between this and the aforementioned category is that futures contain a different underlying security. Financial Industry security can be purchased with derivatives that fall into this category, though the traditional use was more for buying and selling commodities. A future with a specific and set interest rate can be purchased. These derivatives can be used to promise to pay a certain price at a specified time in the future. Additionally, assets may be transferred to another part at a future date.

The third and final category is known as swaps. When two companies have assets they would like to trade, they can simply swap them as it benefits both parties. There are times when one company will want an asset of a certain variety, while another is trying to get rid of an asset of the same nature. As such, parties will agree to exchange assets in order to take advantage of the different effects brought about by various types of interest rates.

Misys consultants can go far beyond these simple definitions of their categories. There are derivatives with varying nuances that are completely different from one to the next. These derivatives can be very useful at one point, and negatively impact a business at another. With the introduction to the main categories listed above, you can begin to understand how assets can be traded, sold, or bought, in order to benefit the company in question. Hopefully this introduction into the world of financial derivatives will bring you enough of an understanding to pursue even more knowledge about them.