Derivatives

One of the more popular forms of investment vehicles are financial instruments called derivatives. Derivatives do not have their own value, but derive value from an underlying asset.

In very simple terms a derivative’s profitability is based on whether the value of the underlying security, which might be a share, bond or index, will increase or decrease by a specific date.

Let's look at some of the different forms of derivatives:

• Options - contracts that entitle their owner to either buy or sell an asset, at a set price and time frame, without imposing an obligation to do so.
• Warrants - products that give the holder the right to trade (buy or sell) or cash settle the underlying instrument with the warrant issuer for a particular price at a particular time according to the terms of issue.
• Contracts for Difference - a leveraged instrument that enables you to gain exposure to shares, indices, commodities and currencies with the potential to take advantage of both rising and falling markets.

The ASX has a great explanation on the differences between options and warrants which is worth  reading before you expore further.