An Inflation Derivative is a subclass of derivative that is used by individuals to mitigate the effects of potentially large levels of inflation. Swaps are the most common types of inflation derivatives, in which a counterparty’s cash flows are linked to a price index and the other counterparty is linked to a conventional fixed or floating cash flow. In finance, inflation … [Read more...]
Interest Rate Derivative
An interest rate derivative is a derivative which has as an ability to pay or receive a given amount of money at a given interest rate. Interest rate derivatives are the most popular kind of derivative, and include interest rate swaps and forex swaps . It is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest … [Read more...]
Equity Derivatives
An Equity derivative is a derivative instrument with underlying assets based on equity securities. The value will fluctuate with changes in its underlying asset's equity, which is usually measured by share price. Equity derivatives can be used to hedge the risk associated with taking a position in stock by setting limits to the losses incurred by either a short or long position … [Read more...]
Credit Derivatives
Credit derivatives are privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. To be precise, Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents. To explain it take an example, a bank concerned that one of its customers may not be … [Read more...]
Vertical Spread
The Vertical spread is an options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices. Profits in a vertical spread are determined by the widening or narrowing of the difference between the option premiums on the two positions. Vertical spreads can be … [Read more...]