Markets - Derivatives - Basics - Definitions - Types of Derivatives

http://www.1mtx.com/markets-trades/en/index.php?language=en&menu=MARKETS&punkt=Derivatives&punkt2=Derivatives&index=Basics#DerivativesBasics Derivatives are financial instruments whose value is derived from the value of something else. They generally take the form of contracts under which the parties agree to payments between them based upon the value of an underlying asset or other data at a particular point in time. The main types of derivatives are futures, forwards, options and swaps. Derivatives Markets : Basics Derivatives are financial instruments whose value are derived from the performance of assets, interest rates, currency exchange rates, or indexes. The main types of derivatives are futures, forwards, options and swaps. CME Group Derivatives generally take the form of contracts under which the parties agree to payments between them based upon the value of an underlying asset or other data at a particular point in time. »...below Latest Updates... Daily Updated: Latest ? Futures Settlements Metals - Energy (Sources: WSJ Market Data Group) Latest Updates... »...The main use of derivatives is to reduce risk for one party while offering the potential for a high return (at increased risk) to another. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (stock market index, consumer price index — or even an index of weather conditions, or others). Their performance can determine both the amount and the timing of the payoffs. »...more (Uses: Insurance and Hedging - Speculation and Arbitrage) Common Derivative contract types There are three major classes of derivatives: ? Futures/Forwards, which are contracts to buy or sell an asset at a specified future date. ? Options, which are contracts that give a holder the right (but not the obligation) to buy or sell an asset at a specified future date. ? Swaps, where the two parties agree to exchange cash flows. Types of Derivatives Over-the-counter (OTC) Derivatives Forwards Options Swaps Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge. According to the Bank for International Settlements (BIS), the total outstanding national amount is USD 298 trillion (2005). Exchange Traded Derivatives Futures Options Standardized derivative contracts (e.g. futures contracts and options) that are transacted on an organized Derivatives or Futures Exchange. According to BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. Derivatives Clearing There is usually a division of responsibility between provision of trading facility and settlement of those trades. While derivative exchanges like the CBOE and LIFFE take responsibility for providing efficient, transparent and orderly trading environments, settlement of the resulting trades are usually handled by Clearing Corporations, also known as Clearing Houses, that serve as central counterparties to trades done in the respective exchanges. For instance, the Options Clearing Corporation and the London Clearing House respectively are the clearing corporations for CBOE and LIFFE. A well known exception to this is the case of Chicago Mercantile Exchange, which clears trades by itself. The world's largest derivatives exchanges (by number of transactions) ? the Korea Exchange (KOSPI Index Futures & Options) ? Eurex (which lists a wide range of European products such as interest rate & index products) ? CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade) ...The Chicago Mercantile Exchange (CME): CME has the largest options and futures contracts open interest (number of contracts outstanding) of any futures exchange in the world. U.S. President Bush is visiting the Merc on March 6, 2001... The Chicago Mercantile Exchange (CME) ADVERTISEMENT Common Derivative contract types There are three major classes of derivatives: Futures/Forwards, which are contracts to buy or sell an asset at a specified future date. Options, which are contracts that give a holder the right (but not the obligation) to buy or sell an asset at a specified future date. Swaps, where the two parties agree to exchange cash flows. Chicago is a major financial center with the second largest central business district in the U.S. The city is the headquarters of the Federal Reserve Bank of Chicago (the Seventh District of the Federal Reserve). The city is also home to four major financial and futures exchanges, including the Chicago Stock Exchange, the Chicago Board of Trade (CBOT), the Chicago Board Options Exchange (CBOE), and the Chicago Mercantile Exchange (the Merc). City of Chicago, IL USA Take a break... 'The Derivatives - Route 66...' ...just relax... More examples of derivatives: » Credit Derivatives » Weather Derivatives Economic derivatives, Freight derivatives, Inflation derivatives, Insurance derivatives, Sports derivatives, Property derivatives »...more FIA: Futures Industry Association (website) Regular OTC Derivatives Market Statistics (BIS - website) Criticisms (Wikipedia) QuantNotes.com (Derivatives News) | Reports | Analysis | Opinions | Comments | "... 'Derivatives are financial weapons of mass destruction' (Warren Buffett) ...The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett has warned. .." Read more...» Buffett warns on investment 'time bomb' (BBC/Business 03/04/2003) "...Both derivatives and hedge funds have grown sharply particularly in the past decade. Since Alan Greenspan took over as Fed Chairman in August 1987 derivatives outstanding according to the ISDA reports that international interest rate and currency derivatives outstanding grew from $865 billion in 1987 to $201.4 trillion in 2005. .." Read more...» Derivatives Disaster, Hedge Fund Monsters? (by David Chapman 11/11/2005 - Safehaven) ^ top Sources: Wikipedia.org; BBC; Safehaven.com; CME.com;.1MTX 2007/2008