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Breaking down the fundamentals of financial derivatives

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.

What is a Derivative Security?

A Derivative Security is a financial instrument whose value depends on the underlying asset.

Examples of Derivative Securities are:

  • Futures
  • Forwards
  • Options
  • Swaps

Examples of Underlying Assets are:

  • Financial Securities
    • Stocks
    • Bonds
    • Currencies
    • Stock indices
  • Commodities
    • Metals (copper, gold, silver)
    • Agricultural (corn, cotton, orange juice, coffee, cattle)
    • Wood
  • Energy
    • Oil products, natural gas
    • Electricity

Futures:

A Futures Contract is an agreement between a buyer (long position) and a seller (short position), to buy or sell the underlying asset at a certain time in the future (which is the maturity date), with a predetermined price.… Read more