Financial derivatives are contracts that have a value depending on an underlying asset, which is variable and, consequently, its financial derivatives vary with it; that is, it is classified in capitalization instruments or equity securities. But how many types of financial derivatives are there? Get to know them in this article.
How many types of financial derivatives are there?
Derivatives can be linked to underlying assets such as stocks, fixed income instruments, stock indices, commodities, corporate bonds, macroeconomic indicators, interest rates, currencies, among others.
Based on this, two types of financial derivatives are established :
Futures are financial derivatives or standardized contracts, that is, those that are traded through the stock exchange. In this type of derivatives, the buyer does not need to invest or pay anything at the time of contracting. However, the contractor must predispose a guarantee before the payment.
When a Future is contracted, an obligation to pay on acquired financial derivatives is contracted against a guarantee that guarantees the counterpart the fulfillment of the agreement. The Futures serve as guarantee contracts between the companies to maintain the price of an underlying asset and not to suffer losses due to the fluctuation of the offer and demand that may arise at the time of purchase.
The Options, are those where you pay a small premium and in some cases you also register a guarantee of payment. These contracts guarantee that in case of losses due to the value of the underlying asset, the losses will not exceed the limit of the premium value, while if there are profits, there will be no limit.
CFDs are contracts of difference where we are trading on margin (using leverage) and their operation is similar to futures.
Types of financial derivatives according to the place of contracting
On the other hand, depending on where the financial derivative is contracted and negotiated, there are two main types of contract:
Over The Counter (OTC) derivatives: are agreements that are agreed between large banks and companies, that is, they are made outside the stock market, so there are no intermediaries.
EDT (Exchange Traded Derivatives): are those that are traded on the financial markets. These derivatives are very liquid and their operation is speculative, and can be traded until maturity.
Types of financial derivatives according to their underlying assets
The types of derivatives are determined by the type of underlying asset to which they are linked, as this is what ultimately determines the value of the derivative, i.e. the value of the underlying is independent, while the financial derivative is dependent on this value. In this respect, the types of financial derivatives according to the underlying asset are:
Interest rate derivatives: their underlying value is the interest rates, so they are quite fluctuating.
Forex” derivatives: Those that invest in foreign currency and their value will depend on the value of the same.
Equity and commodity derivatives: their underlying assets are exchanged on the stock exchange, such as bonds or stocks. But they can also be based on raw materials such as oil or gold.
Credit derivatives: they are used to guarantee credits and refer to their risk.
Other derivatives: Like derivatives of inflation, CO2 emissions, etc.
The types of financial derivatives will be given according to their purpose, type of contract, type of underlying asset to which they are assigned and with the market in which the trading occurs. Therefore, each company and investor evaluates its options, the assets in which it wishes to invest and the advantages it expects to obtain in order to determine the type of financial derivative that suits them.
- 1 How many types of financial derivatives are there?
- 2 Based on this, two types of financial derivatives are established :
- 3 Futures
- 4 Options
- 5 CFDs
- 6 Types of financial derivatives according to the place of contracting
- 7 Types of financial derivatives according to their underlying assets
- 8 Interest rate derivatives: their underlying value is the interest rates, so they are quite fluctuating.