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2025 R66 Module 66.1

Derivatives are securities whose value is derived from underlying assets like equities, bonds, and commodities. They can be traded in over-the-counter (OTC) markets or through formal exchanges, with exchange-traded derivatives offering standardization, transparency, and lower costs. OTC derivatives, while customizable, tend to be less liquid and more expensive, though some require central clearing to mitigate counterparty risk.

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Ĺuke Shah
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4 views3 pages

2025 R66 Module 66.1

Derivatives are securities whose value is derived from underlying assets like equities, bonds, and commodities. They can be traded in over-the-counter (OTC) markets or through formal exchanges, with exchange-traded derivatives offering standardization, transparency, and lower costs. OTC derivatives, while customizable, tend to be less liquid and more expensive, though some require central clearing to mitigate counterparty risk.

Uploaded by

Ĺuke Shah
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Derivatives

Derivatives

Derivative Instrument and


Derivative Market Features

LOS a Define/Describe Derivative Instrument and Market Features

Derivatives
A derivative is a security that derives its value from an
underlying, typically a price or interest rate.

Examples of the underlying:


 Equities and equity indexes

 Bonds, bond indexes, interest rates

 Hard and soft commodities

 Credit, credit indexes

© Kaplan, Inc. 2

1
LOS b Describe/Contrast Derivative Markets and Instruments

Derivative Markets
OTC markets: formal or informal networks
Dealers (market makers) trade with users and among themselves

Exchange-traded derivatives: formal network


Exchange members (market makers) post buy and sell prices,
enter into offsetting trades with users

© Kaplan, Inc. 3

LOS b Describe/Contrast Derivative Markets and Instruments

Exchange-Traded vs. OTC Derivatives


Exchanges
 Contracts are standardized
 Central clearing: collateral deposits, mark-to-market, exchange
takes the other side of each trade (novation); minimizes
counterparty risk
 More transparent, more liquid, lower costs
 More efficient clearing and settlement

© Kaplan, Inc. 4

2
LOS b Describe/Contrast Derivative Markets and Instruments

Exchange-Traded vs. OTC Derivatives


OTC derivatives
 Customizable, less liquid and transparent, higher trading costs
 Many OTC markets required to have central clearing party
(novation) and collateral deposits: reduces counterparty risk,
similar to exchange-traded derivatives

© Kaplan, Inc. 5

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