Derives value from underlying asset: the derivative instruments have the value which is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets, etc, therefore its value changes in response to changes in price of the underlying. Specified obligation: The terms and conditions are specified in each contract separately and maybe distinctive between types of derivatives, therefore the responsibility of the counter parties under forward contract or future contract either option contract or swap contract would be different.
Direct or exchange traded: Direct traded, when the derivatives contracts can be undertaken directly between the two underlying parties. Exchange traded, when the derivatives contracts can be listed for trading on public exchanges. Delivery of underlying asset not involved, despite on this, there is no limits on the number of claims (Contracts) that could be sold on the underlying assets; Derivatives may be used as deferred delivery: that the long and short market to deferred delivery of underlying assets.
Derivatives is a usually a secondary market instruments, exception are warrants ND convertibles; Oust To Know: Warrant is issued and guaranteed by the company, it is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Convertibles A bond that can be converted into a predetermined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder. Exposure to risk could be high: Derivatives are settled at a future date, and can be traded on organized markets (stock exchanges) or unrecognized (over the counter /ETC). The trading through ETC leads to the operational risk, counter party risk and legal risk, because of lack of the control under those deals. Off balance sheet item: The Derivatives are the balance sheet instrument, that could be used by company managers, whose do not have a right to purchase a certain currency, they could buy in advance a structured note whose coupon is tied to the performance of a particular currency pair.