What are interest rate swaps (IRS)?
This is where one stream of fixed-rate interest payments is exchanged for a floating rate stream of interest payments. The contract is based on an agreed principal amount – let’s say $1 million. Delta Corp is currently receiving a fixed rate of 1.5 per cent interest per month on its principal amount, while Omega Investments […]
What are forwards?
A forward contract is a private agreement between two parties obliging either the buyer or seller to purchase or offer an asset at a set price at a specified time. This sounds much like the futures market so far, but where futures are largely standardised and transparent, forwards are custom built – terms agreed privately between buyer […]
What are asset-backed securities
Say a financial company takes an illiquid asset, like a loan or mortgage, and engineers it into something that can be easily sold in the form of a share or security. This is called securitisation. A typical example is the mortgage-backed security. Let’s look at that a little more closely. In this example, Omega Investments has purchased a […]
What are credit default swaps?
A credit default swap (or CDS) is linked to, but not sold by, a corporation or a government that has issued bonds on the capital markets. The seller of the CDS, a bank or other financial institution, receives regular payments – like an insurance premium – from the buyer to cover the possibility that the […]
What are options?
Options are most commonly associated with stocks and stock indices. There are two types of option: a call option (to buy) and a put option (to sell). In an option you’re entering into a contract with a vendor to purchase or sell a specified quantity (100 shares per option) of a security at an agreed price […]
What are futures?
Futures are among the most common derivatives and play a crucial role in financial markets. They help reference pricing expectations for products as varied as commodities, stocks and interest rates. They can also be used in the procurement of raw materials and to hedge against market volatility. As opposed to spot markets, where the price you pay for a product is the current […]
Contract for difference
Chapter 1: What is a CFD? A CFD is a derivative that allows you to trade the price of a stock, asset or other financial product without actually having to own the underlying stock or product. Trading CFDs works very simply: you decide to buy a CFD based on the price of Brent Crude oil (let’s say it’s current level […]
Why buy derivatives?
There are two main reasons for buying derivatives: speculation and hedging. Some securities, like contracts for difference, can also offer investors a way to trade in assets without the need to physically own that asset – for example, you can buy or sell the price of crude oil, without having to make room in your garage for all […]
What is a derivative?
Financial derivatives are so amazingly varied that it’s actually a bit misleading to call them a single ‘market’. Think of all the things we’ve learnt so far about financial markets: about shares, currencies, commodities, indices and so on. There will be a financial derivative linked to every one. And this is the explanation for the term ‘derivative’. These securities are derived from other assets […]
What is forex?
Chapter 1: What is forex? Of all the financial markets, forex is the biggest. Roughly $4 trillion is traded globally every working day. And in many ways it’s the easiest to get your head around. ‘Forex’ or ‘FX’ stands for ‘foreign exchange’. You sell the currency you are holding, let’s say Pounds Sterling, and buy […]
