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Financial Derivatives: An Introduction Financial derivatives are basically securities that are linked to different financial securities. Things like stocks and bonds can be included in this category. The types and varieties of financial derivatives are quite numerous. These securities are quite versatile, and can be implemented in a large number of ways. 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. Options is the first category we will introduce. If there are contracts that allow securities to be purchased at a set price, those derivatives will fall under this category. Most often, these derivatives will be used to trade stock options. Call options and put options are two subcategories that fall beneath the umbrella of the options category. Call options allow one to buy an asset at a specified price during a set time frame, while put options are for selling assets in the same respect. Next, there is the futures category. The last category, options, differs from this one in that futures has a different underlying security. While the traditional use was intended for buying and selling commodities, futures are now often used to purchase financial securities. A future with a specific and set interest rate can be purchased. Futures allow one to pay a set price for an asset at an equally set time in the future. Additionally, assets may be transferred to another part at a future date.
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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. A certain asset might have aspects that are undesirable for one company at a certain point, but would be helpful to another at that same time. A swap will allow the two companies to trade assets with interest rates that will benefit the other, thus creating a profitable venture.
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Financial derivatives can go far beyond these simple definitions of their categories. Derivatives come in many different forms, with very different nuances. These derivatives can be very useful at one point, and negatively impact a business at another. The categories above will help you begin to understand how derivatives can be used to render assets obtained or relinquished in order for a company to get the best possible outcome at any given interval of time. Hopefully this introduction into the world of financial derivatives will bring you enough of an understanding to pursue even more knowledge about them.