Derivatives are financial instruments whose value is determined by or derived from the value of their underlying assets (such as stocks, bonds, indices, commodities, currency exchange rates and interest rates). Common types of derivatives include futures contracts, options, forward contracts and swaps.
Derivatives can either be traded on a securities exchange or over-the-counter (OTC). Exchange-traded derivatives are standardised while OTC derivatives are unregulated and are therefore seen as having greater counter-party risk.
Derivatives may be used for hedging or risk management purposes, but may also be used to speculate on the future direction of the value of the underlying assets. Derivatives may also enable a fund manager to gain exposure to certain markets or securities that are not directly available to the fund due to, for example, jurisdictional restrictions. Find out how derivatives may be used in Platinum’s investments here.