Derivatives
Derivatives are financial contracts or securities whose payoff depends on underlying assets or indices.
Exchange-traded derivatives
· Traded on established exchanges (the New York Stock Exchange, the French CAC or the Chicago Board of Trade).
· Highly standardized terms and features.
· The regulated exchanges provide clearing and regulatory safeguards to investors
Over-the-counter or OTC-traded derivative
· Traded outside of the formal, established exchanges, including forwards, swaps and exotic derivatives
· Can be created by any two counterparties with highly flexible terms and a nearly infinite number of underlying assets or asset combinations
· Large financial institutions serve as derivatives dealers to customize derivatives for the specific needs of clients
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