Summary
Highlights
Derivatives include Futures, Options, Warrants, Certificates, Forwards, Swaps, and CFDs. They are traded on organized markets like stock exchanges (e.g., MEFF in Spain, EUREX, NYSE, CME globally) or over-the-counter (OTC) markets. Organized markets feature standardized contracts and require guarantees, while OTC markets offer customized, flexible, but less liquid contracts without guarantees.
Derivatives allow speculation on price movements without direct purchase of the underlying asset. For example, buying a derivative on oil at €10 that replicates an oil price of €100 means if oil rises by 10% to €110, the derivative also rises proportionally to €11. Leveraged derivatives (e.g., 1:10 ratio) amplify these gains or losses, increasing risk.
Derivatives are also used for hedging risks. An example is a farmer using a Futures contract to guarantee selling oranges at a fixed price (€1000 per ton) six months in advance, protecting against price drops. Conversely, a juice manufacturer might use it to protect against price increases. Both parties secure a future price, eliminating uncertainty.
Derivatives are controversial due to their enormous market size, estimated between 600 and 1,000 trillion dollars, which is 8 to 12 times larger than the global GDP. This indicates a high level of speculation compared to actual transactions. While speculators provide liquidity and help transfer risks, they can also contribute to speculative bubbles and artificial price increases, which has led to accusations of market manipulation, especially concerning essential commodities and affecting vulnerable populations.
Derivatives are classified by contract firmness. Firm contracts (e.g., Futures, Forwards, Swaps) oblige one party to buy or sell an asset at a predetermined price and future date. Conditional contracts (e.g., Options, Warrants) grant the right, but not the obligation, to buy or sell. For instance, a farmer with an Option can choose to sell oranges at €1000 if market prices are lower, or sell at market price if it's higher, by paying a premium for this flexibility.
Financial derivatives are complex investment assets whose value is derived from the price evolution of another underlying asset. These assets can include stocks, bonds, currencies, commodities, or stock indices. Derivatives lack intrinsic value and gain value from the appreciation or depreciation of their underlying asset.