Learn how these derivatives work and how companies can benefit from them. Swaps are generally traded over the counter but are slowly moving to centralized exchanges. The risk can be minimized by using a financially strong intermediary able to make good on the trade, but in a major panic or crash the number of defaults can overwhelm even the strongest intermediaries. You pay commissions each way. Learn the four criteria companies must meet before options on their stock can be traded.
Derivatives are financial instruments whose price is dependent on the value of some underlying asset or indicator. A stock option is a particular kind of derivative, one that allows the holder to buy or sell stock. All stock options are derivatives, but not all derivatives are stock options.
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Other Types of Derivatives
Equity Options. An equity option is a derivative that obtains its value from an underlying stock.. An equity option represents the right, but not the obligation, to buy or sell a stock at a certain price, known as the strike price, on or before an expiration date. If the option is exercised by the holder, the seller of the option must deliver shares of the . Options are financial derivatives that give the option buyer the right to buy or sell at a specific price within a specified period. A further, often ignored, risk in derivatives such as options is counterparty risk. In an option contract this risk is that the seller won't sell or buy the underlying asset as agreed.