Economic Derivative
Categories: Econ, Derivatives
Every math geek in finance loves derivatives. You might be familiar with the general term “derivative,” which is a financial contract based on an underlying asset...the asset it’s “derived” from (just like a derivative in calculus). Besides being another tool to make money with, financial derivatives are a tool investors can use to offset and manage their risk. Take on some risk, offload some risk, it’s up to you...as long as you’re willing to pay for it.
An economic derivative is like a financial derivative, except...different. While financial derivatives are usually based on an underlying asset—like a stock—economic derivatives are based on economic indicators. Think: the unemployment rate, GDP, retail sales, etc. Economic derivatives are an all-or-nothing kind of deal as far as payouts go.
Just like financial derivatives, economic derivatives help investors spread out their risk. For instance, an investor can take a certain type and amount of risk in their portfolio, and offset that risk with an opposing economic derivative...basically by betting...er, speculating...on the economy.
Wanna see one for yourself? You can check them out on an exchange, which has been a thing you could do since 2002. Who knew?
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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]