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Derivative

• A security, like an Option or Future, whose value is derived from another underlying security. Futures contracts, forward contracts, and options are among the most common types of derivatives. Derivatives are generally used by institutional investors to increase overall portfolio return or to hedge portfolio risk.

• Is a financial product which is based upon another product. Futures are based on commodities, financial indices or securities. Options are based on futures, securities or cash markets. Forwards are extensions of the cash market across time. CMOs are derived from MBS and so on. Generally, derivatives are risk management tools, however they are also used for investment or speculative purposes. For more information about DERIVATIVES, click here.

 
 Embedded terms in definition
 Cash market
Cash
Derivatives
Forward contract
Forward
Futures contracts
Futures contract
Futures
Future
Hedge
Institutional investors
Market
Mbs
Options
Option
Portfolio
Return
Risk management
Risk
Securities
Security
Time
Underlying security
Underlying
 
 Referenced Terms
 Actuals: The physical commodity underlying a futures contract. Cash commodity, physical.Is the real or underlying asset for a Derivative product or commodity market.The cash commodity as opposed to the futures contract. Also known as cash or the spot.

 Benchmark: Is the standard to measure, monitor, price or evaluate a security or Derivative. The treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. Here, securities are priced in terms of yield pickup relative to a comparable treasury. This comparability is often in terms of maturity though duration or average life become more meaningful for securities which have option characteristics.The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio's investments.

 Bundling, unbundling: A trend allowing creation of securities either by combining primitive and Derivative securities into one composite hybrid or by separating returns on an asset into classes.

 Cash market: Traditionally, this term has been used to denote the market in which commodities were traded, for immediate delivery, against cash. Since the inception of futures markets for T bills and other debt securities, a distinction has been made between the cash markets in which these securities trade for immediate delivery and the futures markets in which they trade for future delivery.Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: Derivative markets.

 Convergence: The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of the time value. But as the contract nears expiration, the futures price and the cash price converge.Is the behavior of a cash commodity or the underlying security instrument and the Derivative moving towards one another.

 
 Related Terms
 Derivative instruments
Derivative markets
Derivative security

<< Depth of a market Derivative instruments >>

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