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financial derivative investments


Financial derivative investments are investment instruments that derive their value from the underlying securities or physical markets.

Derivatives are used to hedge the underlying assets from changes in value (reducing risks), or to speculate about market changes, to name a few of the existing uses.

Financial derivatives have a bad reputation among investments due to the leverage possibilities, which may cause large shifts in potential profits/losses, while the underlying financial instrument moves only moderately.

There are many classes of derivative instruments, ranging from options, futures (standardized, exchange traded contracts), and forwards (non-exchange formulated contracts).

The financial innovation keeps the number of underlying instruments increasing, but to name a few markets, there are derivatives for stocks, forex instruments, and commodities.

There are also derivatives that derive their value from other derivatives.

Standardized derivatives are traded on exchange s around the world, but banks are also capable of putting together tailor-made financial derivatives for companies in need of such arrangements.

Financial Derivative Investments Resources

Derivate valuation is as complex of problem, more in fact, according to many practioners, as is the valuation of the underlying securities. Many times the valuation is linked, as the derivative changes in value as the underlying security changes in value.

Therefore, an investor thinking about investing in derivatives should educate herself fully in the valuation, risk management, features of derivatives, and the specifics of the marketplace, for example.

To learn about the marketplace, there are books and online resources to get you started. For books, here are few of the available ones:

  • Options, Futures, and Other Derivatives by John C. Hull
  • Introduction to the Mathematics of Financial Derivatives by Salih Neftci and Salih N. Neftci
  • Financial Calculus : An Introduction to Derivative Pricing by Martin Baxter, Andrew Rennie

You can also find a lot about different derivative products from the derivative exchanges' web sites. These web sites include: