- A derivative is a financial instrument whose characteristics and value depend on an underlying asset. The asset can be an equity, currency, bond, interest rate, commodity or even the weather.
Forwards | Futures |
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Typically traded over the counter (OTC). |
Traded on an exchange. |
Varying specifications. |
Standardized specifications. |
Characterised by bilateral negotiation and assumed credit risk. Credit risk lies with the counterparty. |
Central clearing house removes credit risk. |
No cash flows until settlement. |
Primary form of risk management is margin payment and daily mark-to-market settlement. |
Larger markets in currencies and metals. |
Larger markets in fixed income, equities and agricultural commodities. |