Derivatives

According to Peter Coy of the International Swap & Derivative Association, the estimated derivative market worldwide encompasses over150 trillion dollars. This is in far excess of the yearly Gross National Product of the entire United States!
But what exactly are derivatives? Derivatives are financial contracts in which two or more parties take opposite positions as to how a price, index, or interest and currency rates are going change. They, in effect, “derive” their value based on an underlying asset. According to Arnold J. Pattler, these measurable values are based on common stocks and bonds, commodities such gold and oil, broad based indexes, and rates. According to the Federal Reserve Bulletin, derivatives can be classified as forwards and futures, which are agreements to buy or sell something at a specific price and at a specific date, and options which allows the holder of the derivative the opportunity to sell or buy something at a specific price. Basically, derivati...