Financial Literacy Daily 101

Derivative financial instruments ( Derivative Security ) is in the currency, bonds, stocks and other traditional financial instruments based on the derivation and derivatives, to leverage and credit transactions as the characteristics of the financial instruments.

Commonly, there are futures contracts options contracts, forward contracts, swap contracts futures contracts: refers to the unified development of the futures exchange provides for a specific time and place in the future delivery of a certain quantity and quality of physical commodities or financial commodities standardized contracts. Option contract: A contract in which the buyer of a contract pays a certain amount of money to obtain an option contract. Warrants launched in the stock market, belonging to the call option put warrants belonging to the put option.

Forward contract: the contract between the contracting parties to agree on a future date at an agreed value, the buyer to the seller to purchase a certain amount of the underlying items of the contract Swap contract: refers to the contract between the contracting parties to exchange a series of cash flows in the future within a certain period of the contract. According to the different items of the contract, swaps can be divided into interest rate swaps, currency swaps, commodity swaps, equity swaps and so on. Among them, interest rate swaps and currency swaps are more common.

Categorization of instruments

(1) According to the classification of product form, financial derivatives can be divided into independent derivatives and embedded derivatives.

(2) Classified according to trading venues, financial derivatives can be divided into exchange-traded derivatives and OTC-traded derivatives.

(3) Categorized according to the type of underlying instruments, financial derivatives can be divided into derivatives of equity products . Currency derivatives, interest rate derivatives, credit derivatives, and other derivatives

(4) According to the classification of the method and characteristics of the financial derivatives' own transactions can be divided into financial forward contracts, financial futures, financial options, financial swaps and structured financial derivatives.

In reality two methods are usually used to categorize derivatives

(1) According to the type of product, financial derivatives can be classified into four major types of forwards futures options and swaps.

(2) According to the nature of the derivative's native asset, financial derivatives can be categorized into equities, interest rates exchange rates and commodities.