What are Equity Derivatives
- Thread starter Rehan
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Soldato
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It is a future. You buy a stock in advance of todays date at an agreed price. Example... Microsoft valued today at 1 USD per share on the 31 March 2008. You do not actually hold the stock, but on value date i.e. the 31 March 2008 you are contracted to purchase the stock. This is where hedge funds/derivative traders make $$$$ with their market knowledge and knowhow. They would predict the price being much higher than 1 USD a share on trade date i.e. the 31 March 2008 so when they come to sell it the price on the 31 March 2008 maybe 2 USD, they would sell it and make 2 USD as opposed to 1 USD.
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Options basically give you the ability to buy or sell something (usually shares) at a specified time (depends on the type of option e.g. American or European) at a certain price.
Futures are a contract that says I will buy/sell x amount of shares on x date for a certain price.
Main difference is one is an option to trade and the other an obligation
Futures are a contract that says I will buy/sell x amount of shares on x date for a certain price.
Main difference is one is an option to trade and the other an obligation
A derivative is something that derives its value from another product. An equity derivative will derive its value from an equity. Equity is ownership, so shares in a company are equities, because if you own a share, you own part of the company. There are several different types of derivative. There are simple ones (which i think are referred to as "vanilla") and complicated ones (which are referred to as "exotic".) Swaps, options, etc are fairly simple derivatives.
Yep there are loads of derivatives - at work I deal with fixed income derivatives so basically, instead of pricing with regard to the company performance, we price with respect to interest rates (and FX rates).
Swaps, Options, Swaptions (An option on a swap), FRAs (Forward rate agreements) - there's tonnes of different variations of these, Amortising Swaps (where the notional changes through the swap's tenor) - way to much to explain in a simple way.
You have to grasp the basics of derivatives (mainly this is grasping the fact that you aren't actually buying or selling anything), then how payments are worked out and when they are paid is also important.
Futures (exchange traded) and forwards (OTC - over the counter) are probably the most basic in terms of pricing if you want to learn the basics.
Stay away from interest rate derivatives, they can get very interesting and complex.
Swaps, Options, Swaptions (An option on a swap), FRAs (Forward rate agreements) - there's tonnes of different variations of these, Amortising Swaps (where the notional changes through the swap's tenor) - way to much to explain in a simple way.
You have to grasp the basics of derivatives (mainly this is grasping the fact that you aren't actually buying or selling anything), then how payments are worked out and when they are paid is also important.
Futures (exchange traded) and forwards (OTC - over the counter) are probably the most basic in terms of pricing if you want to learn the basics.
Stay away from interest rate derivatives, they can get very interesting and complex.
Associate
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- 16 Oct 2005
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Just wondering what you mean by stay away? They are difficult or boring or what? Considering an offer of some work experience in this area so I'd like to hear your views
Soldato
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Just wondering what you mean by stay away? They are difficult or boring or what? Considering an offer of some work experience in this area so I'd like to hear your views
Take it.
Associate
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I think I will - I just think I find equity stuff more interesting and am concerned that if I do interest rates during an internship it might be tricky to have the option to jump across to something else later on.