Financial derivatives are a test subject of the cmap2 exam. There are many areas that are easily confused, causing many candidates to be unclear about their knowledge. Today, Deep Sky Network will introduce the knowledge points of financial derivatives to you in detail. I hope you will Watch well and study well.

The concept of financial derivatives

Financial derivatives: refers to contracts whose value depends on changes in the value of the underlying asset. Such contracts can be standardized or non-standardized.

Classification of financial derivatives

1. Forward contracts

2. Futures

3. Options

4. Swaps

Trading methods of financial derivatives

1. On-exchange trading

Refers to the situation where all supply and demand parties gather on the exchange for bidding transactions. Transaction method. This trading method has the characteristics that the exchange collects deposits from trading participants, and is also responsible for clearing and performance guarantee responsibilities.

2. Over-the-counter transaction

Refers to the transaction method in which both parties directly become counterparties. This transaction method has many forms, and products with different contents can be designed according to the different needs of each user. At the same time, in order to meet the specific requirements of customers, financial institutions selling derivatives need to have superb financial technology and risk management capabilities.

Basic functions of financial derivatives

1. Hedging

Hedging risks by eliminating uncertainty → locking in the price of future delivery

2. Speculation

Increase investment returns by amplifying risks

Basic case: Company A is a cotton-growing enterprise. Company B is a textile company. Due to the recent abnormal weather changes, both companies are worried that the market price of cotton will fluctuate greatly in the next six months. Company A, as the seller, is worried that the market price of cotton will fall in the future, while Company B, as the acquirer, is worried that cotton prices will rise in the future. Therefore, in order to avoid price uncertainty, both parties signed a 180-day forward contract today. Contract, that is, 6 months later, the two parties trade 10,000 tons of cotton at a forward price of $3,000/ton. Then when the forward contract expires, no matter how the spot price of cotton changes, Company A will sell 10,000 tons of cotton to Company B at the pre-agreed forward price. That is to say, Company A locks in future revenue now, while Company B locks in future costs now.