Derivatives are financial instruments that depend on and derive from the future value of other assets, such as currencies, reference rates, shares, among others.
As a form of contracts, derivatives offer protection to investors, for example against changes in the exchange rate, which occur in uncertain variations.
How the derivatives market works
In their contracts, financial derivatives have as their market value the price that comes from another financial instrument, and that is why they are derived from this other asset.
The use of this instrument is very old, present in sales of goods with a future price and delivery date, but specified since the beginning of the agreement.
Thus, the investor seeks derivatives for a form of protection, known as “hedge”, reducing future risks in their investments.
In addition, derivatives are also used for speculative strategies, since with the guarantee of the price fixed by the contract, it is possible for the speculator to negotiate for the difference in the spot price.
Types of derivative markets
This market can be divided into four different types: forward, futures, options and swaps, although the latter is similar to the forward market.
Known as the most traditional derivative, this contract involves the purchase or sale of a good to be settled later, where the future price is fixed in the contract.
The forward contract is only concluded on the expiration date. In the meantime, it is still possible to negotiate these contracts on the stock exchange or on the off-exchange market (over-the-counter).
The future market can be considered as an evolution of the forward market. The difference is that contract maturities are adjustable during the year.
In addition, futures contracts are only traded on the stock exchange.
These contracts involve the right to buy or sell a certain asset according to the agreed price and future date, initially paying for a premium to acquire the contract.
It is possible to realize that the investor or speculator who acquires an option contract is not obliged to exercise the contract, especially when he is involved in losses.
In the swap market, the contracts serve to negotiate the future profitability of the assets, which in turn derive from other indices, with an exchange of positions between investors.
In foreign exchange swaps, for example, the Selic profitability of an application can be exchanged between the variation of the dollar within a period, offering protection against the variation of the foreign currency.
Derivatives can be used to increase investor capital or help protect against market volatility.
Derivatives are contracts between two parties, the values of which depend on asset prices or the term of the contract.
The most common, as we have seen, are the forward market, the futures market, the options market and the swaps.
Derivatives are used to execute the hedge strategy, protecting investors against market price fluctuations, especially those with high volatility, such as commodities and currencies.
They can also be a great way to make your investments profitable, as they allow leverage, making it possible to trade values much higher than your capital.
It is important to remember, however, that they are high-risk operations and, therefore, require a certain knowledge of the market. Working with derivatives also requires constant monitoring of matters related to the economy and politics.
That way, you will have more property to analyze the indicators and speculate possible movements, investing more safely.