As a result of quantitative driven synthetic derivatives and other constructs by investment bankers and traders since the 1990s, an entirely separate derivatives creation and trading has emerged. International market expansion created the need for foreign currency hedges. Credit default swaps for risk mitigation have exploded in their ubiquity. Equity and interest rate derivatives have also expanded their open interest significantly.
A derivative product company (DPC) is a special purpose vehicle that is most often a subsidiary of a securities firm or a financial institution, and is created to specifically handle derivatives related risk offset work. In order to require the minimum amount of capital to operate, they are structured in such a way as to be able to obtain AAA status. This allows the DPC to function without posting collateral that might be required when dealing with a counterparty of like rating.
Usually armed with a team of quantitative analysts, the DPC is equipped to customize a derivative for a client to offset most any kind of market risk in which the parent also engages. An analogy to the DPC is like Star Lord in Guardians of the Galaxy 2. As the only offspring of the godlike Ego to be worthy of wielding his power, Peter Quill, a.k.a. Star Lord, was the AAA offspring being groomed for the select but lucrative new horizons Ego wished to conquer.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...