In 2003, famed investor Warren Buffett described derivatives as “financial weapons of mass destruction that, while now latent, are potentially lethal”.
It’s significantly desirable to understand the use, purpose, and type of the derivatives in the client’s portfolio to eliminate or at least to avoid the risks and unpredicted consequences.
Derivatives are products “whose value derives from, and is dependent on, the value of an underlying asset”. They are a way of gaining exposure to an asset – typically commodities, currencies or indices, stocks or bonds – without having to buy it outright.
There are two types of derivatives commonly used in funds. Futures give the investor an obligation to buy or sell a particular asset at an agreed future date. Options are similar, but give the investor the right, not an obligation, to buy or sell an asset at a specific price at or before a given date.
These can be used to either speculate – the expectation that an asset will rise or fall, in value to profit – or hedge an existing position – for example, buying an index future to offset a fall in a fund’s long-only portfolio.
While a futures contract can expose an investor to a large gain or a large loss, options generally allow for unlimited upside with a pre-defined maximum loss, which is set at the level of the premium paid.
We offer a variety Derivative instruments for our investors on the various exchanges such as: Borsa Instanbul, ASX, TOCOM, FORTS Futures and Options.
Prior Capital CY Ltd has experience with a number of derivatives product types and structured financing, including:
* Futures, forwards, options and swaps
— Exotic and compound options
— Auction rate securities (ARS) and contingent liquidity instruments
— Structured credit, correlation, and relative-value trading practices
— Mortgage-backed securities («MBS»)
— Financial Guarantees
— Trust-issued securities (e.g., trust-preferred stock and trust-issued contingent capital)
With an average turnover of over $5 trillion per day, the foreign exchange (FX) market is where currencies are bought, sold and exchanged.
Futures are financial contracts obligating the buyer to purchase an asset or seller to sell an asset, such as physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange.
Risk Warning: The futures markets are characterized by the ability to use very high leverage relative to stock markets which Prior Capital CY Ltd urges you to see our Risk Disclosure regarding trading with high-leveraged instruments.
Futures can be used to hedge or speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk, or anybody could speculate on the price movement of corn by going long or short using futures.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.