4

Derivatives Fundamentals

‘Derivatives can be used for risk management or speculation, for risk mitigation, or risk taking.’

Range of derivatives

What is a vanilla trade?

Settlement

Triggers

Liquidity and credit risk

Understanding the ‘underlying’

Benchmarks

Fair value

Dealing with derivatives

RANGE OF DERIVATIVES

A derivative product can be used for risk management or speculation, for risk mitigation, or risk taking. The instrument itself can be bought or sold on an exchange or over the counter (OTC). There may be a premium payable for the product or it may be zero cost, and it may have one settlement or many. There are many variations to the basic ‘vanilla’ derivative. Let us take a few moments to clarify this.

WHAT IS A VANILLA TRADE? ...

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