The International Swaps and Derivatives Association (ISDA) publishes a wealth of information about financial derivatives, their valuation and their use, in addition to providing master documents for their contractual use between parties. Use the following ISDA Internet site to find and discuss five (5) basic financial derivative questions and terms:
ISDAwww.isda.org/educat/faqs.html
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What is a derivative?
A derivative is a financial contract that facilitates transfer of risk from one party to the other. The value of a derivative is derived from the value of the asset in question (Hull, 2015). The underlying asset may include physical commodity, interest rate, equity index, currency, company’s equity shares, and essentially any other tradable instrument upon which traders can agree. A derivative is useful where one party wishes to minimize risk, balance the prospective profits and high earnings for another stakeholder (Shaik, 2014).
Major Derivative Categories Derivatives are classified into three categories which include over-the-counter (OTC) derivatives, exchange-traded derivatives, and cleared derivatives. First, OTC derivatives are custom-made bilateral contracts that help one party to transfer risk to another party. Also referred to as SWAPs, OTC derivatives involve a private agreement between the interested parties who negotiate and book directly with each other…
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