The term itself "derivatives" tells us that they are financial instruments that are derivatives of other assets. Russian legislation, as a rule, does not classify derivative instruments as securities, with the exception of the same option certificates (issuer option).

In modern literature, derivatives include only those instruments that give their holders the right to buy or sell any asset underlying the derivative instrument (derivative) on specific conditions and within a specified time frame.

Initially, this class of instruments (securities) appeared to insure transactions with exchange commodities. Merchants, in order to insure themselves against rising prices for a particular product, entered into a deal to purchase it on the terms of delivery of the product in the future at a pre-agreed price. Later, this class of securities was widely adopted by intermediaries and turned into a tool through which they made profit from price fluctuations of the corresponding exchange asset.

Features of derivative instruments

1. derivative instruments do not provide their holders with ownership of a current asset, but only provide the right to transact with this asset in the future;
2. The value of derivatives is a derivative of the price that underlies the underlying asset. If the price of the underlying asset declines, the price of the corresponding derivative will also fall, and vice versa;
3. The lifespan of derivative instruments is very limited in time, while the underlying asset may be perpetual (stocks, currencies, etc.). Based on this, the derivatives market is called the futures market;
4. the purchase/sale of derivative instruments helps to make a profit with minimal investment, since the investor pays for the entire cost of the asset, and only represents a guarantee fee (deposit margin) or premium;
5. The circulation of derivative instruments in its form is practically no different from the process of circulation of basic securities. The derivatives themselves, with only a few exceptions, are subject to trading on the exchange.

In modern trading, there are 3 basic types of derivatives: forwards, futures and. Let's quickly refresh our memory about the nature of these types of derivatives.

Forwards. A forward is a form of contract, on one side of which, the buyer, must buy the underlying asset at the price of concluding such a transaction at the time the contract is executed, and on the other side, the seller, must sell this asset at the price of concluding the transaction. In its economic essence, a forward is similar to a futures, but, unlike a futures, it is an over-the-counter instrument.

Futures. A futures () is an exchange-traded futures instrument, where the buyer on the execution day must purchase the underlying asset at the contract price, and the seller, in turn, must sell the underlying asset at the price set on the day the transaction is concluded. The basic features of futures contracts were determined by considering forwards. They boil down to the following:

1. futures are, first of all, an exchange instrument that is created by a specific exchange and traded only on it;
2. all parameters of futures, except price, are predetermined and have a specific meaning: standard cost, standard size, certain properties of the product, specific execution period, conditions for early termination of obligations;
3. Since futures are an instrument created by the exchange, it guarantees the fulfillment of all obligations under executing contracts.

Options. An option is a type of forward transaction through which one party acquires for a fee (premium) the right to purchase or sell within a certain period at a certain price the underlying asset that constitutes the option, and the other party to the transaction - the seller - undertakes to carry out the transaction in a specific period at a specific price at requirement of the same buyer.

Today, investors have a fairly wide range of financial instruments and opportunities at their disposal, both to make money on stocks and securities, and on derivative instruments - derivatives.

The derivatives market is one of the main and most active segments of the modern financial system. However, most novice investors have very little understanding of what derivatives are. Accordingly, the opportunities that open up for investors thanks to such instruments remain unclaimed. Or, on the contrary, investors take a thoughtless risk, having little idea of ​​the risks of this instrument.

The essence of a derivative as a financial instrument

To understand what derivatives are and why they are needed, first of all, you need to understand that they are, in simple words, derivative financial instruments. That is, there is an asset that is considered underlying. According to it, a bilateral agreement is concluded, the participants of which undertake to complete a transaction on pre-established conditions.

Despite the complexity of the wording, such agreements are often found in our everyday life. By the way, the simplest example is purchasing a car at a car dealership under the “made to order” scheme. In this case, the buyer enters into an agreement with the dealership for the supply of a car of a specific model, in a specific configuration and at a specific fixed price.

Such an agreement is a simple derivative, in which the asset is the ordered car. Thanks to the concluded contract, the buyer is protected from changes in value, which may increase by the agreed date of purchase. The seller also receives certain guarantees - a rare car, which he purchases from the manufacturer, will definitely be purchased and will not “hang” in his salon as “dead weight”.

The modern derivatives system began to take shape in the 30s of the 19th century. Financial derivatives are a product of the 20th century. The starting point is considered to be 1972, when the international currency market that we know today finally took shape. If previously only real goods were used in such transactions, then with the advent and development of financial derivatives, it became possible to conclude contracts in relation to currencies, securities and other financial instruments, up to the debt obligations of individual companies and entire states.

The Russian derivatives market was formed in the 90s of the last century. Despite the fact that this segment is actively developing, it is characterized by the problems of all young markets. The main feature is the lack of competent personnel, especially among ordinary market players. Not all participants know for sure what derivatives are and their properties. All this leaves an imprint on the development of the market.

Types of derivatives

Classification helps to fully understand what a derivative is and why it is needed. It can be built according to two main features. First is the type of underlying asset:

1. Real goods: gold, oil, wheat, etc.
2. Securities: shares, bonds, bills and much more.
3. Currency.
4. Indexes.
5. Statistics data, for example, key rates, inflation rates, etc.

The second classifying feature is the type of pending transaction. From this point of view, there are 4 main varieties:

1. Forward.
2. Futures.
3. Optional.
4. Swap.

A forward contract is a transaction in which the participants agree on the delivery of an asset of a certain quality and in a specific quantity within a specified period. The underlying asset in forward contracts is real goods, the rate of which is agreed upon in advance. The above example of a car dealership falls into this category. This example really captures the essence in simple language, without fancy words.

Futures is an agreement under which a transaction must take place at a specific point in time at the market price on the date of execution of the contract. That is, if in a forward contract the cost is fixed, then in the case of a futures contract it can change depending on market conditions. The only obligatory condition of futures contracts is that the commodity will be sold/purchased at a specific point in time.

An option is the right, but not the obligation, to purchase or sell an asset at a fixed price before a specific date. That is, if the holder of shares of a certain enterprise announces his desire to sell them at a certain price, then the person interested in the purchase can enter into an option contact with the seller. According to its condition, the potential buyer transfers a certain amount of money to the seller, and he undertakes to sell the shares to the buyer at a set price.

However, such obligations of the seller remain valid only until the expiration of the period specified in the contract. If by the specified date the buyer has not completed the transaction, then the premium he paid goes to the seller, who receives the right to sell the shares to anyone.

A swap is a double financial transaction in which the underlying asset is simultaneously purchased and sold under different conditions. At its core, a swap is a speculative instrument and the only purpose of such actions is to profit from the difference in the price of contracts.

Why are derivatives needed?

In the modern financial system, derivatives and their properties are used in two ways. On the one hand, this is an excellent tool for hedging, that is, insuring risks that invariably arise when concluding long-term financial obligations. Moreover, they are most often used for speculative earnings.

How forward transactions are used has already been discussed above. This is a classic option for hedging price risk. However, in the modern commodity market, futures transactions have become more widespread.

The use of futures allows the seller to insure against financial losses that may occur if the underlying asset he owns is unclaimed. By concluding a futures contract, the owner of an asset can be firmly confident that he will definitely sell it, thereby receiving real money at his disposal.

For the buyer, the value of a futures contact is that he receives a guarantee for the acquisition of an asset that he needs to implement his plans. For example, a manufacturing enterprise needs a stable supply of raw materials, since stopping the technological cycle threatens serious losses. Therefore, it is profitable for management to buy futures for the supply of a specific amount of raw materials by a certain date, thereby ensuring the uninterrupted operation of the enterprise.

Options are more often used to hedge risks arising from trading in the stock market. To understand the mechanism of their action, let's consider a small example. Suppose there is a package of securities that is being sold at the current price of 100 rubles. A certain investor, having analyzed the prospects of the package, came to the conclusion that in the next three months its price should increase by 50% and amount to 150 rubles. However, there is a high probability of financial losses if the forecast does not come true.

In this situation, the investor enters into an option contract with the holder of the package for a period of three months to sell the asset at a price of 100 rubles. For this right, he pays the owner of the securities 10 rubles. Now, if the forecast turns out to be correct and in the near future the share price rises to 150 rubles, the investor will be able to buy a package of securities for 100 rubles at any time before the expiration of the option contract and make a profit of 50 rubles.

If, however, an error was made during the analysis and the price of the package did not increase, but, on the contrary, decreased to 60 rubles, then the buyer of the option has the right to refuse the purchase. In this case, he will suffer a loss of 10 rubles, whereas in the absence of hedging the risk through the option, his loss would be 40 rubles.

The owner of securities can act in a similar way, concluding options for the right to sell an asset at its current value within a certain period. Third, fourth and fifth parties may be involved in the process - the same option can be resold to other market participants, who can dispose of it as an ordinary security.

Similar properties of forwards, futures and options are actively used in speculative games. In the twentieth century, the market began to rapidly become saturated with derivatives. As a result, its volume many times exceeded the market for real goods. This, according to many analysts, was the cause of the last crisis that gripped the global financial system at the beginning of this century.

Therefore, novice investors need to have a good understanding of what derivatives are and how to work with them correctly. Otherwise, illiterate use of such tools can result in serious losses.

A derivative is a derivative financial instrument, a “superstructure” over an asset. A derivative allows you not to purchase the asset itself, but to work only with a contract for its purchase. Thus, the issues of warehousing and delivery of goods as such disappear. Instead, a record simply appears on the stock exchange that such and such an investor owns the right to supply such and such a commodity. As such, a derivative can be a measure of the value of the contract for its acquisition. What is contracted for is called the underlying asset.

Derivatives appeared in the 17th century as insurance against crop losses. Supply contracts then began to be concluded in advance, and not after the products were grown. Thus, sellers knew the volume of demand, and buyers could be confident that there would be no shortage in the market.

Since then, the derivatives market has been many times larger than the market for real goods. The famous investor Warren Buffett calls derivatives “weapons of mass destruction.”

In everyday life, any preliminary agreement that specifies the amount and date of its execution (for example, a contract for the purchase of real estate or a car) can be conditionally considered a derivative.

What types of derivatives are there?

The underlying assets for derivatives can be:

• Securities - shares, bonds, etc.;
• Commodities – gold, oil, gas, etc.;
• Currency;
• Indexes;
• Statistical data: inflation rate, key and interest rates.

What are derivatives used for?

Derivatives are often used to make money on movements (even minor ones) in the value of an asset. As a rule, this goal is set by speculators - exchange players focused on short-term investments.

The second objective of derivatives is to hedge (protect) against the risks of an increase or decrease in the value of an asset (commodity, shares, etc.) in the future. That is, if, for example, it seems to us that Gazprom shares will become much more expensive in six months, then we purchase a derivative to buy them in six months at the price fixed today. At the same time, it is not necessary to purchase the shares themselves as a result. Hedging is already the task of investors.

Derivatives have recently been on the front pages of international financial publications due to their direct connection to the scandalous losses and collapse of several organizations. However, they have been successfully traded for centuries, and the global daily turnover of derivatives transactions reaches billions of US dollars. So maybe derivatives trading is only for experienced professional traders? Maybe it’s better not to contact them at all and leave them to “highbrow scientists”?

It is true that complex mathematical models are used to estimate the value of some derivatives, but the basic concepts and principles underlying derivatives and derivative transactions are not that difficult to understand. Derivatives are increasingly used by market participants, including governments, corporate CFOs, dealers and brokers, and individual investors.

The purpose of this book is to provide an understanding of the basic concepts associated with derivatives and the principles of trading these instruments. This section addresses the following issues.

What are derivatives? Why are derivatives needed? Who uses derivatives? How are derivatives traded and how are they used?

The examples below will help you understand the meaning of some derivatives.

Example 1

Let's say at the beginning of September you decide to buy a new car. Once the brand is chosen, in the local dealer's showroom you set the exact characteristics of the car: color, engine power, steering wheel trim, etc., and most importantly, determine the price. The dealer says that if you order today and pay a deposit, the car will be delivered in three months. What happens to prices after three months, whether a 10 percent discount will be offered or, conversely, your model will rise in price, no longer matters: the price of the car upon delivery is fixed by agreement between you and the dealer. A forward contract was entered into - you acquired the right to buy the car in three months and committed to making this purchase.

Example 2

Now imagine walking into showrooms and discovering that your dream car is on offer for £20,000, but you need to buy it today. You don’t have that amount available, and it will take at least a week to arrange a loan. Of course, you can offer the dealer a deposit and enter into a weekly forward contract, but you have other options.

This time you offer the dealer £100 to just hold the car for you and not change the price on it. At the end of the week, that £100 will go to him whether you buy the car or not. The offer is tempting, and the dealer accepts it. So, an option contract is concluded - in this case it is called a call option. You get the right to buy a car in a week without the obligation to do so.

If within a week you find another dealer offering an identical model for £19,500, you simply won't exercise your option. The final cost of the car will now be £19,500 + £100 = £19,600, which is less than the original offer.

If you can't find a better deal and you buy the car from the first dealer, it will cost you £20,100. If you decide not to buy the car at all, you will lose the £100 you paid to the dealer.

In both examples, you are protecting yourself from rising car prices, or in other words, you are hedging. The hedging process involves certain risks and rewards, which are listed in the table below.

Example 3

The car you bought a call option on is in high demand and its price suddenly jumps to £22,000. Your friend also wants to buy such a car. He heard that you have a one-week option to buy this car for 20 thousand. After visiting the bank, you realize that you really can't afford the car, so you sell your option to a friend for £200. So the dealer makes the sale, your friend gets the car he wanted, and you make £100 by selling your option. In this case, you speculate on your contract and make a 100% profit.

Both considered contracts (forward and option) provide for the delivery of a car on a certain future date, and the price of the deposit and the option is determined by the underlying asset - the car.

So what is a derivative? In financial markets, derivatives mean the following.

A derivative is a financial contract between two or more parties that is based on the future value of an underlying asset.

Initially, derivatives were associated with commodities such as rice, tulip bulbs and wheat. Commodities are the underlying asset of derivatives today, but in addition to this, the underlying asset can be almost any financial indicators or financial instruments. Thus, there are derivatives based on debt instruments, interest rates, stock indices, money market instruments, currencies and even other derivative contracts!

There are currently four main types of derivatives, which are discussed in subsequent sections of this book:

forward contracts; futures contracts; option contracts; swaps.

Definitions of some derivatives

To make the following brief overview of derivatives easier to understand, let's look at the definitions of the four main types of derivatives (aspects regarding their valuation, use, trading strategies, etc. will be covered in the following sections).

A forward contract is a transaction in which the buyer and seller agree to deliver an asset (usually a commodity) of a certain quality and quantity at a certain future date. The price can be agreed upon in advance or at the time of delivery.

Example 1 was a forward contract. The terms of the transaction were established through confidential negotiations with a specific dealer, and you paid a deposit to secure the fulfillment of your obligations.

However, what happens if the car you ordered is not delivered on time or is in the wrong configuration? You will have to resolve the issue with this dealer.

Commodities such as food, metals, oil are contracted on trading platforms called exchanges with standard terms regarding quantity, quality, delivery date, etc. The contracts traded on exchanges are known as futures contracts.

The price of a futures contract is set on the floor of the exchange by buyers and sellers publicly calling out their orders and quotes. In modern markets, contract details are also determined electronically in an automated trading system. This means that once the parties make a deal, everyone in the room receives information about the price paid. Price transparency is one of the main differences between futures contracts and forward contracts, the prices of which are confidential.

A futures contract is a firm agreement between a seller and a buyer to buy and sell a specific asset for a fixed price.

future date. The contract price, which changes depending on market conditions, is fixed at the time of the transaction. Because the contract has standard specifications, both parties know exactly what is being traded.

Do you understand this definition? If you have any doubts, write about it in the space left here.

An options contract gives the right, but not the obligation, to buy (a call option) or sell (a put option) a specified underlying instrument or asset at a specified price - the strike price - on a specified future date - the expiration date - or before it comes. For obtaining such a right, the buyer of the option pays a premium to the seller.

A swap is the simultaneous purchase and sale of the same underlying asset or liability for an equivalent amount, in which the exchange of financial terms provides both parties to the transaction with a certain gain.

A Brief History of Derivatives

The following brief historical sketch helps to introduce the centuries-long development and use of derivatives. For hundreds of years, fortunes have been made and lost in the markets!

30s of the 17th century – Tulips

At the end of the 30s of the 17th century, Holland and England were overwhelmed by tulip mania - a passion for tulip bulbs. Options on them were traded in Amsterdam already at the beginning of the 17th century, and by the 1930s forward contracts appeared for sale on the Royal Exchange in England. The enchanting flourishing of trade and the rise in profits from transactions with tulip bulbs were followed by no less crushing market crashes and loss of fortunes in 1636–37.

Royal Exchange, founded in 1571 to support international trade

Semper Augustus was considered one of the most valuable tulip varieties. In 1636 there were only two such bulbs in Holland. It is known that for just one of them some speculator offered 12 acres of land intended for development. The hero of another story is a sailor who brought news to a wealthy merchant, who proudly displayed a Semper Augustus bulb on the counter of his store. The merchant rewarded the sailor for his service with smoked herring for breakfast. The sailor loved herring with onions and, seeing the “onion” on the counter, put it in his pocket. When the loss was discovered, the merchant rushed after him, but the sailor had already finished off both the herring and the onion. His breakfast was worth a year's salary for the entire ship's crew! For stealing an onion, the unlucky sailor got away with several months in prison.

30s of the 17th century – Rice

One of the earliest examples in the history of futures trading involves the Yodoya rice market in Osaka, Japan. Landowners who received rent in kind - part of the rice harvest - were unhappy with their dependence on unpredictable weather, and they also constantly needed cash. Therefore, they began to deliver rice for storage to city warehouses and sell warehouse receipts - rice coupons that gave their owner the right to receive a certain amount of rice of a specified quality at a certain future date at an agreed price. As a result, landowners received a stable income, and traders received a guaranteed supply of rice plus the opportunity to profit from the sale of coupons. In an attempt to predict future prices, the successful merchant and moneylender Munehisa of the Honma family began to display price movements graphically in the form of so-called “Japanese candlesticks” and thus laid the foundation for “chartism”, or technical analysis.

If the closing price is lower than the opening price, the candle color is red or black. If the closing price is higher than the opening price, the candle is empty or white.

Early 19th century Put and Call options

Trading put and call options on shares at this time was already part of the practice on the London Stock Exchange, but this process was not without problems. In 1821, passions regarding options trading ran high. The Exchange Committee received from a number of its members a demand for "the complete abolition of put and call options, which are now so common that they constitute the majority of stock trading and are definitely prejudicial to the interests of those who do not agree with such practices."

But there were other members who were more positive about options trading, and the situation was resolved in their favor.

New stock exchange. Etching by T. Rowlandson (1756-1827) and A. S. Pugin (1762-1832) from Ackerman's London Microcosm series Guildhall Library, Corporation of London/Bridgeman Art Library, London

The history of modern futures trading can be traced back to the mid-nineteenth century with the development of the grain trade in Chicago. In 1848, the Chicago Board of Trade (CBOT) was established, which became a place where buyers and sellers could conduct commodity exchange transactions. At first, trade was carried out only in cash goods, and then in goods that “should have arrived,” that is, contracts providing for the delivery of goods at an agreed price on a future date. The first CBOT forward contract on record was dated March 13, 1851, for delivery of 3,000 bushels of corn in June. The problem was that the first forward contracts did not have uniform conditions, and besides, they were not always fulfilled. In 1865, CBOT formalized grain trading by introducing contracts called futures, which standardized:

grain quality; amount of grain; time and place of grain delivery.

The price of the futures contract was openly set during the trading process on the exchange floor. It was these early grain futures contracts that formed the basis of the commodity and financial futures contracts used today.

The American Civil War provided an opportunity for the “highbrow scientists” of the day to create derivatives that met the needs of the moment. The Confederate States of America issued bonds with the right to choose one of two currencies, which allowed the southern states to borrow funds in pounds sterling and repay the debt in French francs. In this case, the bond holder had the right to convert the payment into cotton!

On American exchanges, trading options on commodities and stocks became a practice by the 60s of the 19th century, and at the very beginning of the 20th century the Put and Call Brokers and Dealers Association was founded.

70s of the XX century Financial futures

Despite the fact that for a long time various states limited and prohibited trading in futures and options, in 1972 a new division was created at the Chicago Mercantile Exchange (CME) - the International Monetary Market (IMM), which became the first specialized exchange platform for trading financial futures contracts - currency futures. Until this point, only commodities were used as the underlying asset of futures. That same year, CBOT was denied permission to begin trading stock futures. In response to the ban, she established the Chicago Board Options Exchange (CBOE) in 1973. This was the year that Fisher Black and Myron Scholes published their option pricing formula.

By the end of the 1970s, financial futures had gained widespread acceptance and were traded on exchanges around the world.

80s Swaps and over-the-counter 20th century derivatives

Trading on the stock exchange is carried out through open trading, during which traders shout out their conditions, making them known to everyone present on the exchange floor. However, derivative contracts can also be concluded confidentially, for example, face to face, by telephone, or by teletype. In this case, they are called over-the-counter (OTC). Although over-the-counter forwards and options contracts existed before this, it was only in the 1980s that trading in them became significant. It was at this time that the role of swaps first became noticeable. Among the first swaps were those that involved the exchange of interest payments on loans, where one party exchanged its fixed interest rate for a floating interest rate held by the other party.

Why are derivatives needed?

In the examples of using forward and option contracts discussed above, we have already mentioned the risks and benefits that arise for the buyer of a car. Obviously, the dealer, i.e. the seller, is also exposed to a similar risk: the buyer, for example, may not be able to pay for the car.

Derivatives are very important for risk management because they allow them to be shared and limited. Derivatives are used to transfer elements of risk and thus can serve as a form of insurance.

The possibility of risk transfer entails the need for parties to a contract to identify all risks associated with it before the contract is signed.

Also, keep in mind that derivatives are a derivative instrument, so the risks associated with trading them depend on what happens to the underlying asset. Thus, if the settlement price of a derivative is based on the spot price of a commodity, which changes daily, then the risks associated with that derivative will also change daily. In other words, risks and positions require continuous monitoring, since both gains and losses can be very significant.

Before you continue studying the material, try to answer the question of who uses derivatives. Explain your views on who can use forwards, futures, options and swaps. We do not provide answers to this task, since the next section covers the topic completely.

Some exchanges were mentioned in our historical sketch. At the end of the section, we present a figure that indicates the founding dates of the most famous exchanges in the world that trade derivatives.

Royal Exchange, London Baltic Exchange, London London Stock Exchange (LSE) Philadelphia Stock Exchange (PHLX) New York Stock Exchange (NYSE) Chicago Mercantile Exchange (CBOT) New York Cotton Exchange (NYCE) New York Mercantile Exchange (NYMEX) ) London Metal Exchange (LME) Tokyo Stock Exchange (TSE) Minneapolis Grain Exchange (MGE) Chicago Mercantile Exchange (CME) Tokyo Grain Exchange Sydney Derivatives Exchange (SFE) Chicago Board Options Exchange (CBOE) Hong Kong Derivatives Exchange International Petroleum Exchange, London (IPE) ) London International Financial Futures and Options Exchange (LIFFE) Singapore International Money Exchange (SIMEX) Swedish Options Market, Stockholm (OM) Brazilian Mercantile and Futures Exchange (BM&F) French International Financial Futures Exchange (MATIF) Paris Traded Options Market (MONEP) Swiss Financial Futures and Options Exchange (SOFFEX) Tokyo International Financial Futures Exchange (TIFFE) Financial Futures Market, Barcelona (MEFF) German Stock Exchange Amsterdam Bourses - amalgamation of the Amsterdam Stock Exchange (1602) and the European Options Exchange (1978)

What are derivative financial instruments (financial derivatives) in simple words? How does the derivatives market work in 2019?

Derivatives market

To explain what it is in simple words, we can say that derivatives are a security for a security. The term is based on the English word derivative, which literally translates as “derivative function”

Derivatives belong to the so-called secondary instruments. Secondary or derivative financial instruments are types of contracts that are based on an underlying (primary) asset.

The basis of a derivative can be almost any product (oil, precious and non-ferrous metals, agricultural, chemical products), currencies of different countries, ordinary shares, bonds, stock indices, commodity basket indices and other instruments. There are even derivative securities on another derivative - an option on a futures, for example.

That is, derivatives are securities that provide their holder with the right to receive other types of assets after a certain period of time. Moreover, the price and requirements for these financial documents depend on the parameters of the underlying asset.

The derivatives market has much in common with the securities market and is based on the same principles and rules, although it also has its own characteristics.

In extremely rare cases, the purchase of a derivative security involves delivery of an actual commodity or other asset. As a rule, all transactions are made in non-cash form using the clearing procedure

What types of derivatives are there?

Classification by underlying asset

1. Financial derivatives- contracts based on interest rates on bonds of the US, UK and other countries.
2. Currency derivatives- contracts for currency pairs (euro/dollar, dollar/yen and other world currencies). Futures for the dollar/ruble pair are very popular on the Moscow Exchange.
3. Index derivatives- contracts for stock indices such as the S&P 500, Nasdaq 100, FTSE 100, and in Russia also futures for the Moscow Exchange and RTS stock indices.
4. Equity derivatives. Futures for a number of Russian shares of leading companies are also traded on the MICEX: LUKOIL, Rostelecom, etc.
5. Commodity derivatives- contracts for energy resources, such as oil. For precious metals - gold, platinum, palladium, silver. For non-ferrous metals - aluminum, nickel. For agricultural products - wheat, soybeans, meat, coffee, cocoa and even orange juice concentrate.

Examples of derivatives

• futures and forward contracts;
• currency and interest rate swaps;
• options and swaptions;
• contracts for differences and future interest rates;
• warrants;
• depositary receipts;
• convertible bonds;
• credit derivatives.

Features of the derivatives market

Russian legal acts do not recognize most derivatives as securities. The exception includes options issued by a joint stock company and secondary financial instruments based on securities. These include depository receipts, forward contracts on bonds, and stock options.

While primary assets are typically purchased to hold the underlying asset and receive a profit on subsequent sale or interest income, investments in derivatives are made to hedge investment risks.

For example, an agricultural producer insures himself against loss of profit by concluding a futures contract in the spring for the supply of grain at a price that suits him. But he will sell the grain in the fall, after the harvest. Automakers hedge their risks by concluding the same agreements to receive non-ferrous metal at a price that suits them, but in the future.

However, the investment opportunities of derivatives are not limited to hedging. Buying them with the aim of selling them later for speculative purposes is one of the most popular strategies on the stock exchange. And, for example, futures, in addition to high profitability, attract the opportunity to get leverage for a significant amount for free with not the largest investments.

However, you must keep in mind that all speculative transactions with secondary financial instruments are high-risk!

When choosing derivatives as a means of making a profit, an investor should balance his portfolio with more reliable securities with low risk

Another nuance is that the number of derivative financial instruments may well be much greater than the volume of the underlying asset. Thus, the issuer's shares may be less than the number of futures contracts on them. Moreover, the issuing company of the underlying financial instrument may have nothing to do with the creation of derivatives.

What are the advantages of derivatives?

The derivatives market is attractive to investors and has a number of advantages over other financial instruments.

Among the advantages of derivatives as a tool for making profit, it is worth noting the following:

1. Derivative financial instruments have a relatively low barrier to entry into the market and make it possible to start with minimal amounts.
2. The ability to make a profit even in a declining market.
3. The ability to make greater profits and get them faster than from owning shares.
4. Savings on transaction costs. For example, an investor does not need to pay for the storage of derivatives, while brokerage commissions for such contracts are also very low and can amount to several rubles.

Conclusion

Derivatives are an interesting and popular investment tool that allows you to receive significant profits in a relatively short period of time. However, the rule is fully applicable to them: higher profitability means more risks.

Diversification of the investment portfolio and inclusion of more stable, but less profitable securities, allows these risks to be reduced