Definition Arbitrage refers to the practice of taking advantage of price differences in different markets or forms of an asset to generate a profit. This financial strategy is primarily reliant on the principle of ‘buy low, sell high’ within a short time frame, ensuring that the investor faces minimal risk while maximizing returns.
Components of Arbitrage Price Discrepancy: The fundamental basis of arbitrage is the existence of price differences for the same asset across different markets.
Definition A call option is a financial contract that grants the buyer the right, but not the obligation, to purchase an underlying asset at a predetermined price, known as the strike price, before a specified expiration date. Call options are often used by investors who anticipate that the price of the underlying asset will rise.
Components of a Call Option Understanding the components of a call option is crucial for any investor:
Definition Commodity derivatives are financial instruments whose value is derived from the price of underlying commodities such as gold, oil and agricultural products. These derivatives are essential tools in the financial markets, primarily used for hedging risks associated with price fluctuations, allowing traders and investors to manage exposure in volatile markets efficiently.
Components of Commodity Derivatives Commodity derivatives consist of several key components:
Underlying Asset: The physical commodity itself, such as crude oil, natural gas, grains or metals.
Definition The Covered Call Strategy is a popular investment technique where an investor holds a long position in an asset, such as stocks and simultaneously sells call options on that same asset. This method allows investors to generate additional income from the premiums received from selling the call options while maintaining ownership of the underlying asset.
Components of the Covered Call Strategy Long Position: The investor must own the underlying asset, like shares of a stock, to implement a covered call strategy.
Definition Credit Default Swaps (CDS) are financial derivatives that allow an investor to “swap” or transfer the credit risk of a borrower to another party. In simpler terms, they are like insurance policies against the default of a borrower. The buyer of a CDS pays a premium to the seller, who in return agrees to compensate the buyer in the event of a default or other specified credit event related to the underlying asset.
Definition The derivative market is a financial marketplace where instruments known as derivatives are traded. A derivative’s value is derived from the price of an underlying asset, which can be anything from stocks to commodities, currencies and even interest rates. This market plays a critical role in providing opportunities for risk management, speculation and arbitrage.
Components of the Derivative Market The derivative market comprises several key components, including:
Underlying Assets: The assets from which derivatives derive their value, such as equities, bonds, commodities or currencies.
Definition Derivatives are financial instruments whose value is derived from the performance of an underlying asset, index or interest rate. They are essentially contracts between two parties and their primary purpose is to manage risk by allowing investors to hedge against potential losses or to speculate for profit.
Components of Derivatives Underlying Asset: This can be stocks, bonds, currencies, commodities or interest rates. The price movement of this asset influences the value of the derivative.
Definition ESG stands for Environmental, Social and Governance, three critical factors used to evaluate the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
Environmental criteria consider how a company performs as a steward of nature.
Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates.
Definition Equity derivatives are financial instruments whose value is based on the price of underlying equity securities, such as stocks. Essentially, they allow investors to gain exposure to stock price movements without actually owning the stocks. This can be incredibly useful for hedging risks, speculating on price movements or enhancing portfolio returns.
Components of Equity Derivatives Equity derivatives primarily consist of:
Options: Contracts that give the holder the right, but not the obligation, to buy or sell an underlying stock at a predetermined price before a specified expiration date.
Definition Exotic derivatives are financial instruments that provide more complex and tailored solutions compared to their standard counterparts, such as options and futures. They often involve intricate structures and unique features, making them suitable for specific trading strategies or risk management practices. While traditional derivatives are straightforward in their payoff structures, exotic derivatives can have varied outcomes depending on multiple factors, including underlying assets, market conditions and specific terms outlined in the contract.