What are derivatives?

Derivatives in your investments

You may have some investments in derivatives. Your asset types may vary – but will often include swap, commodities, forwards and futures.

Swap

A contract between two parties to ’swap' the values of two financial assets (such as shares or commodities) over a set period of time. A swap is often used to manage or offset risk. This has the potential to generate a return – depending on market performance. However, these asset values can fluctuate, and may fall below zero.

Commodity

A marketable asset produced to satisfy particular wants or needs. Common examples include iron ore, wheat, cattle or cotton. Commodity derivatives contracts get their value from the performance of these assets.

Forward

These are a private agreement between two parties to buy or sell a financial asset at a predetermined price on a specified date. Often used to manage or offset risk. If the price is higher or lower on settlement day than what was initially paid, can result in a profit or loss. Forward contracts can be customised, but aren't traded on a standard exchange. These asset values can fluctuate, and may fall below zero.

Futures

Legal agreements between two parties to buy or sell a financial asset at an agreed price on a specified settlement date. If the price is higher or lower on settlement day than someone initially paid, can result in a profit or loss. These asset values can fluctuate, and may fall below zero.

Index certificate

These work in a similar way to shares and funds, because they can be bought or sold at any time. However, the certificate’s value is typically derived from fluctuations in price and performance of financial assets. It may come with a specific maturity (or end) date, and a wide range of structures with different strategies and risk profiles. Index certificates are a way to invest in assets that wouldn't otherwise be easily accessible.

Options

A contract between two parties which provides the right to buy or sell assets at a mutually-agreed price. The buying or selling rights for each asset will expire on a specific date.

Warrant

Enables the warrant holder to purchase a company’s shares at a specific price, by a particular date. There’s no obligation. However, if the purchase hasn't been made by that date, a new warrant with a different price might be issued.