As a special term, derivative products first appeared in formal legal texts in a lawsuit between American Express and CFTC in 1982.
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? Derivatives?
First of all, according to its name, "derivative": according to the annotation of Xinhua Dictionary, it refers to a new substance that has evolved from the parent substance. In other words, derivation must be based on a parent substance, and then a new substance is derived.
Just like fungus is a derivative based on trees, live game is a derivative based on games, and take-away is a derivative based on catering services.
Then in the financial industry, derivatives must be financial products based on some underlying assets.
From the perspective of the industry, the Group of 30 released a report entitled "Practices and Rules of Derivative Products" in 1993, in which the definition of derivative products is as follows: "Financial derivative products are bilateral contracts or payment exchange agreements, and their value comes from basic assets or some basic interest rate or index, as the name implies".
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? What can be used as the underlying asset in financial products?
Nowadays, the basic assets on which financial derivatives depend include interest rates, exchange rates, commodities, stocks and other indexes.
For physical goods, such as crude oil, wheat, copper, etc. , can be used as a basic asset. These physical objects are also traded on special exchanges in China, such as Zhengzhou Commodity Exchange and Dalian Commodity Exchange.
Shanghai Futures Exchange specializes in trading derivatives with financial assets as the target, such as foreign exchange, bank deposits, stocks and securities.
In fact, interest rates, exchange rates or various comprehensive price indexes can also be used as basic assets, and they are also widely used.
All of the above are general classifications. If detailed examples are given, there will be countless examples, and with the maturity of financial markets, there will only be more and more types.
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How can we "become" derivatives?
Let's have a look in English:
An agreement between two parties whose value is determined by the price of other things.
So now knock on the blackboard with me to draw the key points!
Agreement? The first is an agreement or contract.
Two parties must be two parties, two people or two organizations or two companies.
Value is value.
Anything else? This value is not determined by itself, but by a third party.
Why single out these four points? Because only through these four points can we judge whether it is a derivative.
Then let's think about a question, is oral gambling a derivative?
The answer is yes, oral gambling is a derivative. Don't be surprised, don't be surprised, try to use these four points to judge whether they meet these four points.
Furthermore, is the stock index a derivative?
The stock index is not a derivative, because it does not meet the fourth point, its value is not determined by a third party, it is a point, and its value is determined by its multiplier.
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What can derivatives do? Why do you need derivatives?
Derivatives have three main uses.
First, it is used for risk management.
This is also the biggest role of derivatives. In fact, if a company can't carry out internal risk management, it must use derivatives for external risk management.
For example, Mead Johnson's acquisition of Durex is a typical example of internal risk hedging. If there is no baby monkey, then use durex; If you have a little monkey, you should drink milk powder.
The second is for speculation.
What is speculation? Speculation can be regarded as a kind of venture capital. Speculation is not to minimize losses, but to maximize profits. For investors who want to make a profit with smaller funds, derivatives are undoubtedly the best weapon.
Third, it is used as arbitrage.
To understand what arbitrage is, we must first understand an economic hypothesis-law of one price. Law of one price is a purchasing power parity theory put forward by Friedman in 1953. Law of one price believes that in a freely competitive market, if the same commodity is sold in different countries and priced in the same currency, its price should be equal.
To put it simply, according to law of one price's law, the candied haws you eat in the streets of old Beijing and those you eat under Tower Bridge in London (if any) should be at the same price. If the two prices are not equal, then you can buy from the low-priced candied haws and go to the high-priced place, so that you can successfully become the arbitrage king of candied haws.
So is the strategy used by arbitrageurs in the financial market, except that they are not sugar-coated haws, but financial products.
? Summary:
1. Derivative products must be products derived from some basic assets.
Second, through the agreement, both parties, value, and other things, you can judge whether it is a derivative.
Third, derivatives are mainly used for risk management, speculation and arbitrage.