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Types of Equity Derivatives

What are the equity derivatives?

In stock market conditions, derivatives are financial assets whose price are derived from underlying assets such as bonds, stocks etc.

Equity Derivatives are a type of derivative whose value is derived, at least partly, from underlying equity securities including stocks, stock indexes.

Types of equity derivative

Some of the types of equity derivatives used in equity trading are:

Options:

Options allow investors to buy/sell shares of a stock at a particular set price, called as the strike price.

The contracts of option can be applicable to make a purchase (call) or sell (put).

On the other hand, there is no obligation for the investor to make the trade.

A contract of an option state the type of option (call / put), the total number of shares, strike price, the expiry date of the contract

The option’s price, generally termed as Premium, depends on the expiry date, the strike price, and the stock’s instability.

Options are used by investors to hedge risk in the equity market.

Futures:

This is a contract between two parties, where the buyer agrees to buy and the seller agrees to sell the underlying equities at a contract price on a pre-specified date in the future.

Purchasing futures derivatives bonds the trader to an obligation, where the buyer must and should purchase shares of the stock on the date as per the futures contract. The seller is also obligated to sell on the specified future date.

Warrants:

This Grants rights to the holder to buy the underlying stock at a specific date in the future but there is no obligation tied to it.

These are issued by companies and not investors. Warrants are offered to those who hold stocks and bonds of a company.

Investors can exercise warrants to call or put (buy or sell) shares at a particular price, which is much higher than what it was when the warrant got issued.

Swaps:

This is an agreement between two parties to exchange cash flows, one of which comes from an equity index, while the other is bonded to the index or stock’s return.

Swaps are normally used to keep away from transaction costs that are connected with the buying or selling of stocks and provide the investor with a cash flow that is similar to the returns of any other stock.

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