## what are the financial derivatives?

basically it’s a contract which price is based on price of another financial asset

### example of a derivative

company A buys a derivative form bank B by which

B will pay 1 million euros if Ibex 35 index is bigger than 20000 points in one year’s time (this on is called digital call option)

## Types of derivatives

there’re **derivatives** which can be bought in organized markets , like stock exchanges , and there are other type which are negotiated in private

OTC **derivatives** (over the counter)

also, **derivatives** could be classified by underlying security:

### interest rate derivatives

example: dirivatives whose payout depends on level of Euribor , for example swaps

### FX derivatives

example: payout depens on EURUSD exchange rate

### Equity derivatives

example: payout depends on Santander stock price

### credit derivatives

example: A pays B 1 million if company C goes broke

### commodity derivatives

A pays B difference between precio del crudo Brent crude price and Ural crude price

another way to classify them is by exercise type:

### american exercise

option can be exercised at any date before maturity

### european exercise

option can be executed only at maturity

### bermudan exercise

option can be executed at various time points

## derivatives markets

OTC **derivatives** market is huge: total outstanding notion at the end of 2011 was 10 time bigger than world GDP (700 trillion $)