10. Derivative Contracts
To fully understand this chapter, you will need to read Sections 9.1 and 9.2 first. Derivative financial trades [3] are gaining an increasingly prominent role in trading. A derivative trade is one whose value depends on another security’s value. The simpler forms of derivatives have been around for quite a while; for example, stock options were first traded on an organized exchange in 1973. Since then, more and more exotic variants of derivatives have appeared. They are valuable to investors because they reduce the risk that comes from changing prices. However, when they are not properly controlled, derivatives can be dangerous: Recently, in several famous cases, organizations have lost spectacular amounts of money on ...
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