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The development of
futures and options
and OTC derivatives
What are derivatives?
‘Derivatives’ is a generic term used to describe a wide range of products
that derive their price or have their value linked in some way to some
other product.
As a result the derivative product can be used as a synthetic version
of that other product, often referred to as the underlying, and this
enables many different strategies to be developed, including hedging
and speculative ones. For instance if we think the price of say BP
shares is likely to move sharply upwards but it would equally be pos-
sible that something might happen to make the shares fall in price,
we may be reluctant to commit funds to buying the shares. On the
other hand if there is a product that allows us to have an exposure to
the BP share price but without, at this stage, committing to paying
the full value we would be more inclined to back our judgement. This
is because we would know that if we were wrong we would not have
committed all the required funds needed to buy the shares them-
selves but if we were right the product, a derivative of BP, would tend
to move in the same way as the price of BP shares and we would
profit from it.
Two derivative products that were established early on were the
futures contract and the options contract. It is not easy to determine
exactly when these products or similar types of product first saw
the light of day but one thing for sure is that today, futures and
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