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Types Of Derivative Agreements

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Global assets vs. global derivatives: This chart shows the total global wealth relative to the total face value of derivative contracts between 1998 and 2007. Overall, there are two categories of derivative contracts that differ in the way they are traded in the market. In addition to categorizing derivatives on the basis of disbursements, these are equally distributed on the basis of their underlying. Since a derivative always has an underlying, it is customary to classify derivatives on an asset basis. Equity derivatives, weather derivatives, interest rate derivatives, commodity derivatives, currency derivatives, etc., are the most popular that deduce their name from the asset on which they are based. There are also credit derivatives whose underlying is the credit risk of the investor or government. DTCC manages, through its Global Trade Repository (GTR) service, global trade repositories for interest rates, commodities, currencies, credit and equity derivatives. [80] It establishes global business reports at the CFTC in the United States and plans to do the same for ESMA in Europe and for regulators in Hong Kong, Japan and Singapore. [80] It covers cleared and unsecured OTC derivatives, whether a trade is traded electronically or tailor-made. [80] [81] [82] The actual share of derivative contracts used for hedging purposes is unknown[26], but it appears to be relatively small. [27] [28] In addition, derivative contracts represent only 3-6% of the exchange rate and total interest rate risk of both companies.

[29] Nevertheless, we know that, for a variety of reasons, the derivatives activities of many companies have at least one speculative component. [29] From an economic point of view, financial derivatives are cash flows that are stochastically conditioned and discounted to the present value. The market risk inherent in the underlying is linked to the financial derivative by contractual arrangements and can therefore be traded separately. [7] There is no need to acquire the underlying. Derivatives therefore make it possible to strengthen ownership and participation in the market value of an asset. It also provides considerable leeway in the design of contracts. This contractual freedom allows derivatives designers to modify almost arbitrarily the participation in the performance of the underlying. Therefore, participation in the market value of the underlying may actually be lower, stronger (leverage) or reversed. Thus, the price risk of the underlying can be controlled in almost any situation. [7] TBTs are the main challenge with regard to the use of derivatives valuation models. Since these contracts are not publicly negotiated, no market price is available to validate the theoretical assessment. Most of the results of the model depend on inputs (which means that the final price depends heavily on how we deduce prices).

[65] It is therefore common for OTC derivatives to be valued by independent agents who designate in advance the two counterparties involved in the transaction (when signing the contract). . . .