What Are the Different Types of Derivative Financial Instruments?

Derivative financial assets are also called financial derivatives. Financial derivatives, also known as "financial derivatives", are a concept corresponding to basic financial products. They are based on basic products or basic variables. Derived financial products in which the price (or value) of the underlying financial product changes. The basic product mentioned here is a relative concept, including not only spot financial products (such as bonds, stocks, bank time deposit notes, etc.), but also financial derivatives. The variables that underlie financial derivatives include interest rates, exchange rates, various price indices, inflation rates, and even weather (temperature) indexes.

Derivative financial assets

(Financial term)

Derivative financial assets were created in the 1970s. Since its appearance, it has developed rapidly. The main reasons for the generation and rapid development of derivative financial assets are:

The high inflation rate in the 1970s and the generally implemented floating exchange rate system made evading inflation risk, interest rate risk, and exchange rate risk an important requirement for financial transactions. Derivatives can effectively transfer some unwilling risks of investors to those willing to take them.

2. Favorable conditions such as the gradual deregulation of financial regulations and the advancement of communication technology and information processing technology promote the rapid development of derivative instruments. The advent of advanced technology has greatly reduced the cost of implementing hedging, arbitrage and other risk management strategies, which has also greatly increased the supply of derivative instruments.

3. Increasing competition in the financial industry has prompted financial institutions to continue financial innovation and launch new financial derivatives.

Since the 1970s, breakthroughs have been made in derivative valuation models and technologies such as option pricing models, and significant progress has been made, which will help investors to more accurately evaluate and manage derivative assets, as well as the issuance and use of derivative instruments. Promote the normal development of derivative assets.

(1)

Financial derivatives can be classified differently according to the types of basic instruments, risk-return characteristics and their own trading methods.

(1) According to the classification of product forms, financial derivatives can be divided into

The previous regulatory approach has faced severe challenges in the face of the booming development of derivative businesses. One of the reasons is that

The enthusiasm of international financial derivatives trading has become the most shiny trading target in the financial market. Although financial derivatives have the functions of risk aversion and price discovery, they have a high degree of financial leverage, coupled with a high degree of Correlation and Covariance between international markets. Their understanding and application are insufficient. Improper or poor supervision will threaten the stability of the global financial system. Financial derivatives are still new investment instruments to the financial market, and they continue to be introduced, with more and more changes, and the calculation of prices and profit and loss has become more complicated. Of course, financial derivatives are a new field for legal norms, and legal risks are relatively high. Coupled with the launch of new commodities such as credit and meteorological financial derivatives, the boundaries between financial derivatives and insurance have been blurred, which has led to disputes over whether such financial derivatives are regulated by insurance law.

According to statistics, most of the losses in financial derivative transactions originate from legal defects or imperfections. Chinese legal practitioners and scholars have limited research in this field. The reason is that on the one hand, it is due to the esoteric nature of financial expertise, and on the other hand, due to the lack of market practice experience, the content of financial derivatives and The transaction process cannot be understood in depth, and it is difficult to have incisive analysis and unique insights. This study starts with the definition of financial derivatives, discusses the changes and development of financial derivatives, and concludes the risks of financial derivatives through legal function analysis. From the perspective of legal and economic analysis, the necessity and particularity of supervision are explained, and reasonable and effective supervision principles are constructed. In addition, this article will also analyze whether the supervision of financial supervision is suitable for China's implementation from the perspective of foreign regulatory framework models and financial derivative market norms, and try to build the legal norms that China should have to facilitate the integration with international markets; reference will be made to international accounting standards. Relevant regulations in other countries explain the legal responsibilities of information providers. In addition, this article will gradually elaborate on the legal qualitative nature of financial derivative transactions, the nature and characteristics of transaction contracts, and in-depth study of ISDA Master Agreement clauses, and international litigation on financial derivative disputes Cases, sorting out and analyzing the claims and defenses put forward by the parties to outline the legal risks of financial derivatives.

Intertemporal. Financial derivatives are contracts that both parties to the transaction predict the trend of changes in interest rates, exchange rates, stock prices, and other factors, and agree to trade or choose whether or not to trade in certain conditions in the future. No matter which kind of financial derivative instrument, it will affect the cash flow of the trader in the future for a period of time or at a certain point in the future. The characteristics of intertemporal transactions are very prominent. This requires both parties to make a judgment on the future trend of price factors such as interest rates, exchange rates, and stock prices. The accuracy of the judgment directly determines the trader's profit and loss.

Leverage. Financial derivative transactions generally only need to pay a small amount of margin or royalty to sign large forward contracts or swap different financial instruments. For example, if the futures trading margin is 5% of the contract amount, the futures trader can control the contract assets 20 times the amount of the transaction, and achieve the effect of small strokes. While the gains may be multiplied, the risks and losses borne by traders will also be multiplied. Slight changes in the price of the underlying instrument may cause large gains and losses for traders. The leverage effect of financial derivatives determines to a certain extent its high speculation and high risk.

Linkage. This means that the value of financial derivatives is closely related to the underlying product or underlying variables, and the rules have changed. Generally, the payment characteristics associated with financial derivatives and basic variables are specified by the derivative contract, and the linkage relationship can be either a simple linear relationship or a non-linear function or a piecewise function.

Uncertainty or high risk. The trading consequences of financial derivatives depend on the accuracy of the traders' predictions and judgments on the future prices (values) of the underlying instruments (variables). The unpredictability of the price of the underlying instruments determines the instability of the financial derivatives trading profit and loss, which is an important incentive for the high risk of financial derivatives. The uncertainty of the price of basic financial instruments is only one aspect of the risk of financial derivatives. In a report published by the International Securities Regulatory Commission in July 1994 (ISOCOPD35), financial derivatives were also accompanied by the following risks:

Credit risk of loss caused by the counterparty in the transaction and failure to fulfill the commitment;

Market risk of loss due to adverse changes in asset or index prices;

Liquidity risk caused by investors' inability to liquidate or liquidate due to lack of counterparties in the market;

Settlement risks that may be caused by the counterparty's inability to pay or deliver on time;

Operational risk caused by human error or system failure of the transaction or management personnel, and control failure;

The legal risks caused by the contract not complying with the laws of the country where it is not fulfilled, or the contract terms are missing and ambiguous.