According to the definition of financial circles, financial derivatives are bilateral contracts between traders to exchange cash flow or transfer risks. Common ones are forward contracts, futures, options and swaps. There are many kinds of financial derivatives in the world. At present, the financial derivatives trading in China mainly refers to the financial business centered on futures. Futures can be divided into commodity futures and financial futures. The latter mainly includes currency futures, interest rate futures and index futures.
Judging from the types and definitions of financial derivatives, its biggest feature is to rely on an investment mechanism to avoid the risk of capital operation, and at the same time, it has the functions of speculative trading in financial markets and attracting investors.
Classification of financial derivatives
The lower the margin, the greater the leverage effect and the greater the risk. There are many kinds of financial derivatives in the world, and active financial innovation activities constantly introduce new derivatives. Financial derivatives are mainly divided into the following categories.
(1) According to the product form. It can be divided into four categories: forward, futures, options and swaps.
Forward contracts and futures contracts are both forms of transactions in which both parties agree to buy and sell a certain amount and quality of assets at a certain price at a certain time in the future. Futures contracts are standardized contracts formulated by futures exchanges, which stipulate the expiration date of contracts and the types, quantity and quality of assets to be bought and sold. Forward contracts are contracts signed by buyers and sellers according to their special needs. Therefore, the liquidity of futures trading is high and the liquidity of forward trading is low.
A swap contract is a contract signed by both parties to exchange certain assets in a certain period in the future. More precisely, a swap contract refers to a contract signed by both parties to exchange cash flows that they think are of equal economic value in a certain period in the future. Interest rate swap contracts and currency swap contracts are more common. If the swap currency specified in the swap contract is the same currency, it is an interest rate swap; If it is a foreign currency, it is a currency swap.
Option trading is the trading of buying and selling rights. Option contracts has stipulated the right to buy and sell primary assets of a specific kind, quantity and quality at a specific time and at a specific price. Option contracts include standardized contracts listed on exchanges and non-standardized contracts traded over the counter.
(2) According to the primary assets, it can be roughly divided into four categories, namely, stocks, interest rates, exchange rates and commodities. If subdivided, the stock category includes the stock index formed by specific stocks and stock combinations; Interest rates can be divided into short-term interest rates represented by short-term deposit rates and long-term interest rates represented by long-term bond rates; Currency category includes the ratio between different currencies: commodity category includes all kinds of physical commodities.
(3) According to the transaction method, it can be divided into on-site transaction and off-site transaction.
On-site trading, also known as exchange trading, refers to the trading mode in which all supply and demand sides concentrate on the exchange for bidding trading. The characteristic of this trading method is that the exchange collects the deposit from the trading participants, and is also responsible for liquidation and performance guarantee. In addition, due to the different needs of each investor, the exchange designs standardized financial contracts in advance, and investors choose the contracts and quantities closest to their own needs for trading. All traders are concentrated in one place, which increases the density of transactions and generally forms a highly liquid market. Futures trading and some standardized option contract trading all belong to this trading mode.
OTC, also known as OTC, refers to the way in which both parties directly become counterparties. There are many forms of this transaction, 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. Over-the-counter transactions constantly produce financial innovations. However, because the liquidation of each transaction is carried out by both parties, the participants in the transaction are limited to customers with high credit. Swaps and forwards are representative derivatives of OTC transactions.
According to statistics, among the positions of financial derivatives, according to the transaction form, the positions of forward transactions are the largest, accounting for 42% of the total positions, followed by swaps (27%), futures (18%) and options (13%). From the perspective of transaction objects, interest rate financial derivatives represented by interest rate swaps and interest rate forward transactions have the largest market share, accounting for 62%, followed by currency derivatives (37%) and stock and commodity derivatives (1%). During the six years from 1989 to 1995, the scale of financial derivatives increased by 5.7 times. There is little gap between various trading forms and various trading objects, and the whole is expanding at a high speed.