Options warrants swaps article: Option finance Equity options are the most common type of equity derivative.
Main article: Warrant finance In financea warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much lower than the stock price at time of issue. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers.
Options let investors hedge risk or speculate by taking on more risk. A single stock future is a contract to deliver shares of a certain stock on a specified expiration date. A stock warrant means the holder has the right to buy the stock at a certain price at an agreed upon date.
Main article: Convertible bond Convertible bonds are bonds that can be converted into shares of stock in the issuing companyusually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features.
It can be used by investors to obtain the upside of equity-like returns while protecting the downside with regular bond-like coupons.
Equity futures, options and swaps[ edit ] Investors can gain exposure to the equity markets using futures, options and swaps. These can be done on single stocks, a customized basket of stocks or on an index of stocks.
These equity derivatives derive their value from the price of the underlying stock or stocks. Stock market index futures[ edit ] Main article: Stock market index future Stock markets index futures are futures contracts used to replicate the performance of an underlying stock market index.
How swaps work - the basics
They can be used for hedging against an existing equity position, or mark ivanov binary options reviews on future movements of the index.
Indices for OTC products are broadly similar, but offer more flexibility.
They have similar characteristics to equity index derivatives, but are always traded OTC over the counter, i. These are used normally for correlation trading. Single-stock futures[ options warrants swaps ] Single-stock futures are exchange-traded futures contracts based on an individual underlying security rather than a stock index.
What are Equity Derivatives?
Their performance is similar to that of the underlying equity itself, although as futures contracts they are usually traded with greater leverage. Another difference is that holders of long positions in single stock futures typically do not receive dividends and holders of short positions do not pay dividends.
Warrants are issued by company or financial institution. On the exercise of warrant shares which meet out the obligations are received directly from the company. Underlying asset Bonds, indices and domestic shares. Currencies, international shares. Definition of Options Options imply the fundamental category of derivative securities.
Single-stock futures may be cash-settled or physically settled by the transfer of the underlying stocks at expiration, although in the United States only physical settlement is used to avoid speculation in the market. Equity index swaps[ edit options warrants swaps An equity index swap is an agreement between two parties to swap two sets of cash flows on predetermined dates for an agreed number of years.
The cash flows will be an equity index value swapped, for instance, with. Swaps can be considered a relatively straightforward way of gaining exposure to a required asset class.
Equity Derivative What are Equity Derivatives?
They can also be relatively cost efficient. Main article: Equity swap An equity swap is an exchange of future options warrants swaps flows between two parties that allows each party to diversify its income for a specified period of time while still holding its original assets.
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The two sets of nominally equal cash flows are exchanged as per the terms of the swap, which may involve an equity-based cash flow such as from a stock asset that is traded for a fixed-income cash flow such as a benchmark ratebut this is not necessarily the case. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios.
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