Derivatives, a class of financial instruments, play a significant role in modern markets. Among them are various types that investors and traders frequently engage with. One prevalent example is options, which grant the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified timeframe. Another derivative gaining traction is single stock futures, which are contracts to buy or sell a specific stock at a future date for a predetermined price. These instruments allow investors to speculate on the future price movements of individual stocks.
Warrants are also noteworthy derivatives. They are essentially options issued by a corporation, giving the holder the right to buy the company’s stock at a fixed price until the expiration date. Another popular derivative is contract for difference (CFD), a contract between two parties to exchange the difference between the opening and closing prices of a particular financial instrument. CFDs offer traders the opportunity to profit from price fluctuations without owning the underlying asset.
Lastly, index return swaps are derivatives that allow investors to swap the returns of their investment with the returns of a specific index. These swaps are often used for hedging purposes or to gain exposure to a particular market without directly investing in all the individual securities within the index. These examples represent just a fraction of the diverse array of derivatives available in the financial markets.
(Response: The five examples of derivatives are options, single stock futures, warrants, contract for difference (CFD), and index return swaps.)