Derivative instruments: what are they?

Financial derivatives are instruments that have no intrinsic value but are derived from the performance of other financial assets. These assets are called underlying assets.

Underlying activities can be of the nature:

• Financial: in this case we talk about stocks, interest rates, bonds and market indices;
• Real: i.e. goods such as oil, gold, cocoa, etc.

There are many and varied types of derivatives.

These instruments are increasingly popular contracts within the financial markets and not only in those regulated by competent authorities but also OCT (Over the Counter markets).

Derivatives traded within regulated markets have standardized characteristics regarding a certain type of parameters.

Some of the main ones include:

• Futures;
• Options;
• Warrants;

OTC derivatives, on the other hand, are traded outside regulated markets and made directly between contracting parties. Moreover, since they are not listed by any exchange, the rules are decided privately. They underlie contracts that can be modified but always by agreement between the parties and not unilaterally. Two OTC contracts with different terms can be traded on the same underlying at the same time.

They belong to this type of derivatives:

• Swaps: contracts in which two parties exchange spot and forward cash flows, either periodic or one-time, that are calculated by applying a predefined pattern;
• Forward: forward contracts, either buy or sell, in which settlement occurs at a future date with the delivery of the contracted asset while the delivery price (or forward price) is established at the time the contract is entered into.