Derivatives
A derivative takes its value from something else, and that simple idea powers the futures, forwards, and swaps institutions use to hedge and to speculate.
The explainers here detail futures contract specifications, tick value, SPAN margin, cash versus physical settlement, the basis between spot and futures, roll yield, and open interest, then apply them to the most active contracts and Treasury futures.
The treatment stays practical: how a contract is built, how it settles, and how a position is financed and marked.
Investing With Purpose keeps the focus on cost and risk, the two things that decide whether a hedge or a leveraged bet actually works in practice.
A futures contract is a standardized, exchange-traded agreement to buy or sell a specific asset at a fixed price on a…
Every futures contract has a printed specification sheet that defines exactly what is being traded. These specs…
Tick value is the dollar amount you win or lose when a futures contract moves by one minimum price increment. It is the…
Futures margin is the performance bond a trader posts to guarantee future contract obligations, not a down payment on a…
When a futures contract expires, it settles in one of two ways: cash or physical delivery. The choice is baked into the…
Basis is the difference between the cash (spot) price of a commodity and the price of a related futures contract. It is…
Roll yield is the portion of a futures return that comes from rolling expiring contracts into later ones rather than…
Open interest is the total number of outstanding futures contracts that have not yet been closed, offset, or delivered.…
A handful of futures contracts account for the bulk of global daily volume. Knowing their specs cold is the first step…
Treasury futures are exchange-traded contracts on US government debt. They let institutions hedge interest-rate risk…
Equity index futures are contracts on the level of a stock index, cash-settled at expiry. They are the primary tool for…
Agricultural futures are contracts on crops and livestock that let farmers hedge harvests and let traders speculate on…
Metals futures trade on COMEX, the metals division of CME Group. They span precious metals (gold, silver, platinum,…
Energy futures are contracts on crude oil, refined products, and natural gas. They are among the most volatile and…
Currency futures are exchange-traded contracts on foreign exchange rates. They offer a centrally cleared alternative to…
An interest rate swap is a contract between two parties to exchange streams of interest payments on a fixed notional…
Swap valuation is the process of calculating the present value of a swap's two cash-flow streams and taking the…
A currency swap is a contract in which two parties exchange principal and interest payments in two different…
A credit default swap is a contract in which one party pays a periodic premium to a second party, who agrees to…
A total return swap is a contract in which one party pays the total economic return of a reference asset to another,…
A variance swap is a forward contract on the realized variance of an underlying asset. One side pays realized variance,…
A dividend swap is a contract that pays the realized dividends of an underlying stock or index against a fixed amount.…
A swap spread is the difference between the fixed rate on an interest rate swap and the yield on a Treasury bond of the…
CDS indexes are tradable baskets of credit default swaps referencing a standardized set of corporate or sovereign…
CDS pricing evolved from a single quoted par spread to a fixed coupon plus upfront payment in 2009. Understanding the…
A correlation swap is an over-the-counter contract whose payoff depends on the average realized correlation of a basket…
A structured note is an unsecured debt instrument whose payoff is engineered from an embedded derivative. The retail…
An autocallable note is a structured product that redeems early with a coupon if the underlying sits above a threshold…
Total return swaps can turn a small pool of hedge-fund capital into a concentrated multi-billion-dollar position…
A quanto option is a cross-currency derivative whose payoff references an asset denominated in one currency but pays…
A barrier option is an exotic contract whose existence or extinction depends on whether the underlying price touches a…
An Asian option is an exotic contract whose payoff depends on the average price of the underlying over a sampling…
A lookback option pays off based on the best price the underlying reached during the contract's life, effectively…
A digital option, also called a binary option, pays a fixed amount if the underlying meets a strike condition at…
A range accrual note is a structured fixed-income product whose coupon accrues only on days the reference rate or asset…
A total return swap transfers the full economic return of a reference asset from one counterparty to another in…
A variance swap is a forward contract on the realized variance of an underlying asset. It lets a trader take a pure…