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In financean equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded. Equity options are the most common type of equity derivative. In financea warrant is a security that entitles the holder to buy stock of the company that issued it equity and options trading a specified price, which equity and options trading much lower than the stock price at time of issue.
Equity and options trading are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Convertible bonds are bonds that can be converted into shares of stock in the issuing companyusually at some pre-announced ratio.
It is a hybrid security with debt- and equity-like features. It can be used by investors to obtain the upside of equity-like returns while protecting the downside with regular bond-like coupons.
Investors can gain exposure to the equity markets using futures, options and swaps. These can be done on single stocks, a customized basket of stocks or on an index of stocks. These equity derivatives derive their value from the price of the underlying stock or stocks. Stock markets index futures are futures contracts used to replicate the performance of an underlying stock market index. They can be used for hedging against an existing equity position, or speculating on future movements of the index.
Indices for Equity and options trading products are broadly similar, but offer more flexibility. Equity basket derivatives are futures, options or swaps where the underlying is a non-index basket of shares.
They have similar characteristics to equity index derivatives, but are always traded OTC over the counter, i. Single-stock futures are exchange-traded futures contracts based on an individual underlying security rather than a stock index. Their performance is similar to that of the underlying equity itself, although as futures contracts they are usually traded with greater leverage. Another difference is that holders of long positions in single stock futures typically do not receive dividends and holders of short positions do not pay dividends.
Single-stock futures may be cash-settled or physically settled by the transfer of equity and options trading underlying stocks at expiration, although in the United States only physical settlement is used to avoid speculation in the market. An equity index swap is an agreement between two parties to swap two sets of cash flows on predetermined dates for an agreed number of years. Swaps can be considered a relatively straightforward way of gaining exposure to a required asset class.
They can also be relatively cost efficient. An equity swap, like an equity index swap, is an agreement between two parties to swap two sets of cash flows.
In this case the cash flows will be the price of an underlying stock value swapped, for instance, with LIBOR. A typical example of this type of derivative is the Contract for difference CFD where one party gains exposure to a share price without buying or selling the underlying share making it relatively cost efficient as well as making it relatively easy to transact.
Other examples of equity derivative securities include exchange-traded funds and Intellidexes. From Wikipedia, the free encyclopedia. Stock market index future.
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