Derivative Instruments

Derivative instrument, or only derivative, is a kind of financial instrument. As the name suggests, the value of a derivative is derived from the value of the underlying asset. The value by using which a derivative instrument calculates its value is termed as underlier.

• Examples:

• It can be explained with an example, say, and stock option. The value of the stock option is derived from the stock value; therefore a stock option can be a derivative.

• Another good example of derivative instrument is the interest rate swap, for it calculates its value using the interest rate indices.

Classification:

• Derivative instruments can be classified through several ways. One is the difference between non-linear derivatives and linear derivatives.

The non-linear derivatives have non-linear payoffs whereas; the linear derivatives have linear payoffs. Non-linearity occurs in case of an option.

• Another two types of derivatives are exotic derivatives, which are complicated, and vanilla derivatives, which is very common.

 

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Last Updated on : 1st August 2013