GLOSSARY

Canadian Financial, Real Estate and Mortgage Glossary

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Derivatives


Synonyms:based off, by-product, offshoot, outgrowth, spin-off
Filed Under: financial-banking, investments
Tags: banking, investment
 

Definition of derivatives

derivatives
1. Financial contracts whose value is derived from the value of some underlying asset, rate or index. Derivatives are used as risk-management tools by governments and corporations to reduce exposure to risk, mainly related to fluctuations in foreign-exchange and interest rates. Derivative instruments include swaps, options, futures and forward contracts and are used by banks in two principal activities: sales/trading and asset/liability management.

Related Terms and Acronyms:

  • foreign currency (FCY)   Paper money and coins from other countries.
  • futures   Contracts to buy something in the future at a price agreed upon in advance. They first developed in the agriculture commodity markets but often involve foreign exchange, Eurodollar deposits and government bonds.
  • index   A table of yields or interest rates being paid on debt (such as Treasury notes or bank deposits) that is used to determine interest-rate changes.
  • investment   Something you put your money into in order to make money.
  • issuer   A legal entity that develops, registers, and sells securities including stocks, bonds and derivatives.
  • portfolio   A collection of investments.
  • secondary market   A market where financial instruments such as stocks, bonds, options and futures are bought and sold to investors.
  • securities/investment dealer   One who acts as the agent for another party to buy and sell securities and other investments; also an underwriter.
  • security   A tradable financial implement that represents ownership, the rights to ownership or debt.
  • swap   An agreement between two businesses to exchange commodities, payments or other financial products to reduce the risk of volatile market conditions or to obtain a better price or rate. For example, interest rate swaps, where floating rate interest is exchanged for fixed rate interest, protects a corporation against rises in rates or allows it to take advantage of a better rate. A cross-currency swap enables two parties to enter into an agreement in which one exchanges its currency for the other's to meet their separate requirements.

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