A derivative security is one that 'derives' its value from the value or return of another asset o... more A derivative security is one that 'derives' its value from the value or return of another asset or security. Exchange-traded derivatives (Futures), are standardized contracts, have good liquidity in most cases, are backed by a clearinghouse and often trade in a physical location. OTC (over-the-counter) derivative contracts (securities) are customized and have poor liquidity. The contract is with a specific counterparty and there is default risk since there is no clearinghouse to guarantee performance. Forward contracts, swaps and most bond options are OTC derivatives. Derivatives based on stock prices are equity derivatives.
A derivative security is one that 'derives' its value from the value or return of another asset o... more A derivative security is one that 'derives' its value from the value or return of another asset or security. Exchange-traded derivatives (Futures), are standardized contracts, have good liquidity in most cases, are backed by a clearinghouse and often trade in a physical location. OTC (over-the-counter) derivative contracts (securities) are customized and have poor liquidity. The contract is with a specific counterparty and there is default risk since there is no clearinghouse to guarantee performance. Forward contracts, swaps and most bond options are OTC derivatives. Derivatives based on stock prices are equity derivatives.
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