Equity derivative

Equity derivative

In finance, an equity derivative is a class of financial instruments whose value is at least partly "derived" from one or more underlying equity securities. Market participants trade equity derivatives in order to transfer or transform certain risks associated with the underlying security. Options are by far the most common equity derivative, however there are many other types of equity derivatives that are actively traded.

Equity options

Equity options are the most common type of equity derivative. [ [http://www.investopedia.com/terms/e/equity_derivative.asp Investopedia.com—Equity derivatives] ] They provide the right, but not the obligation to trade a quantity of stock at a set price at a future time.


In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issue. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers.

Convertible bonds

Convertible bonds are bonds that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features. It can be used by investors to obtain the upside of equity-like returns while protecting the downside with regular bond-like coupons.

Equity futures, options and swaps

Investors can gain exposure to the equity markets using futures, options and swaps. These can be done on single stocks, a customized basket of stocks or on an index of stocks. These equity derivatives derive their value from the price of the underlying stock or stocks.

tock market index futures

Stock market index futures are futures contracts used to replicate the performance of an underlying stock market index. They can be used for hedging against an existing equity position, or speculating on future movements of the index. Indices for futures include well-established indices such as S&P, FTSE, DAX, CAC40 and other G12 country indices. Indices for OTC products are broadly similar, but offer more flexibility.vague|date=March 2008

Equity basket derivatives

Equity basket derivatives are futures, options or swaps where the underlying is a non-index basket of shares. They have similar characteristics to equity index derivatives, but are always traded OTC (over the counter, ie between established institutional investors),dubious as the basket definition is not standardised in the way that an equity index is.

ingle-stock futures

Single-stock futures are exchange-traded futures contracts based on an individual underlying security rather than a stock index. Their performance is similar to that of the underlying equity itself, although as futures contracts they are usually traded with greater leverage. Another difference is that holders of long positions in single stock futures typically do not receive dividends and holders of short positions do not pay dividends. Single-stock futures may be cash-settled or physically settled by the transfer of the underlying stocks at expiration, although in the United States only physical settlement is usedto avoid speculation in the market....

Equity index swaps

An equity index swap is an agreement between two parties to swap two sets of cash flows on predetermined dates for an agreed number of years. The cash flows will be an equity index value swapped, for instance, with LIBOR. Swaps can be considered as being a relatively straightforward way of gaining exposure to an asset class you require. They can also be relatively cost efficient.

Exchange-traded derivatives

Other examples of equity derivative securities include exchange-traded funds and Intellidexes.


Wikimedia Foundation. 2010.

Игры ⚽ Поможем написать курсовую

Look at other dictionaries:

  • Equity Derivative — A derivative instrument with underlying assets based on equity securities. An equity derivative s value will fluctuate with changes in its underlying asset s equity, which is usually measured by share price. Investors can use equity derivatives… …   Investment dictionary

  • derivative — de·riv·a·tive 1 /də ri və tiv/ n: a contract or security that derives its value from that of an underlying asset (as another security) or from the value of a rate (as of interest or currency exchange) or index of asset value (as a stock index) ◇… …   Law dictionary

  • derivative product — ➔ product * * * derivative product UK US noun [C] STOCK MARKET, FINANCE ► a DERIVATIVE(Cf. ↑derivative): »Companies minimize risks by buying a derivative product which provides the right to buy or sell the underlying equity at a fixed price on a… …   Financial and business terms

  • Equity capital markets — Equity capital is raised in many ways; the major types of equity capital are unlisted equity, listed equity and hybrids. Equity capital market practices traditionally advise in a full range of equity, debt equity linked, hybrid, asset backed,… …   Wikipedia

  • derivative contracts — A derivative, derivatives or derivative contracts are financial instruments whose value derives from the value and characteristics of underlying products. The underlying assets (often referred to as the underlying or underlier ) are extremely… …   Law dictionary

  • derivative contract — A derivative, derivatives or derivative contracts are financial instruments whose value derives from the value and characteristics of underlying products. The underlying assets (often referred to as the underlying or underlier ) are extremely… …   Law dictionary

  • Derivative (finance) — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • Equity (law) — The Court of Chancery, London, in the early 19th century Equity is the name given to the set of legal principles, in jurisdictions following the English common law tradition, that supplement strict rules of law where their application would… …   Wikipedia

  • Equity Capital Market - ECM — A market that exists between companies and financial institutions that is used to raise equity capital for the companies. Some activities that companies operate in the equity capital markets include: overall marketing, distribution and allocation …   Investment dictionary

  • Derivative Product Company - DPC — A special purpose entity created to be a counter party to financial derivate transactions. A derivative product company will often originate the derivative product to be sold; as well, they may guarantee an existing derivative product or be an… …   Investment dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”