Exchange traded derivatives come in many sizes and shapes. There are many different types of exchange traded derivatives, and they are traded all over the world in different exchanges. In this article, we will take a closer look at some of the most popular types of exchange traded derivatives.
Stock-Related Exchange Traded Derivatives
The most popular asset class used in exchange traded derivatives is common stocks. These types of derivatives are called stock-related derivatives and they are available in a few types meaning that there can be stock forwards and stock options.
Usually stock swaps are not traded over any exchange even if they may become part of the counter transactions. Stock forwards and options allow people to make highly leveraged bets on the price movement in a particular stock if they are confident that the given stock will surely rise or fall in value. The global stock derivatives are considered to be leading indicators predicting the direction of the future movement of stock.
Index Related Derivatives
There are also index related derivatives. This means that instead of buying or selling futures and options in a given stock, the investor can buy or sell the whole exchange. And because the exchange is nothing but a portfolio of stocks, these can also be considered as a kind of stock related derivatives.
On the other hand, there is one important difference. Stock options can be settled in cash or in kind, which means that somebody can demand actual delivery of stocks. Index derivatives, however, cannot be settled in kind. One unit of Dow Jones Industrial Average isn’t possible.
Currency Related Derivatives
Derivatives contracts referring to currencies are also commonly listed on exchanges for trading. Thus, investors can go long or short on these currency pairs. The over-the-counter market offers a wide range of contracts that can be negotiated as and when needed.
Contrary to this, the exchange traded derivatives market only provides a few popular currency pairs that are listed. Since the contracts are standardized and liquidity is a concern, the index offers standardized contracts on for a few pairs of currencies that are highly traded.
Commodities Related Derivatives
In most countries, commodities are widely used for trading derivatives. Even the very first derivative exchange in the world, the Chicago Board of Trade, was created to facilitate derivative trading in commodities.
In most countries there are multiple exchanges that offer trading opportunities in thousands of commodities. Therefore, there are thousands of contracts available in the market. This is what makes it difficult to trade these markets. Commodities markets were earlier used by people to hedge away from risks. However, recently, it has become highly speculative.
Real Estate Related Derivatives
Real estate derivatives were at the center of the most recent economic meltdown in 2008. Derivatives didn’t leave real estate industry unharmed. Rather, it was common practice to break down the cash flow from real state rentals into bond payments. This is what securitization of assets is all about.