Section 7.1 Financial Derivatives
At times one might want to base a contract between two or more parties which is based upon the value of some asset. Such an instrument which has a price based upon these assets is called a derivative. The value of a derivative varies according to the value of the underlying asset which may include stocks, bonds, and currencies.
Derivatives were developed historically to account for international trade and the likelihood of varying exchange rates. Presently they can often be based upon virtually anything which can be measured such as market indices or even the weather.
There are several standard derivative forms:
- Futures Contracts
- Forward Contracts
- Swaps
- Options
- Credit-backed Derivatives
- Mortgage-backed Security