Derivatives Trading

Derivatives trading involves contracts whose value is derived from an underlying asset, rate, or index. Common derivatives include futures, options, swaps, and forwards.

Uses

Derivatives are used for hedging, speculation, and relative value strategies. They provide leverage and the ability to express views on volatility, interest rates, or specific risk factors.

Pricing and Margin

Derivative pricing depends on factors such as underlying price, time to maturity, volatility, and interest rates. Most derivatives require margin, which amplifies both gains and losses. Margin rules differ by venue and product.

Key Risks

Leverage can lead to rapid losses. Liquidity can be thin in some maturities or strikes, leading to wide spreads and partial fills. Complex payoffs introduce model risk and may behave unpredictably during stress events.

Operational Considerations

Position management must account for expiry, roll decisions, and settlement mechanics. Risk systems should track greeks and exposure to underlying drivers.

Conclusion

Derivatives offer powerful tools for trading and hedging, but they demand careful risk management, robust pricing, and disciplined execution.