Types Of Equity Derivatives

Some of the types of equity derivatives used in equity trading are:

1. Options:

Equity options allow investors to buy/sell shares of a stock at a special set price, called the strike price.

The equity option contracts can be applied to make a purchase (call) or sell (put).

On the other hand, the investor has no obligation to make the trade.

A contract of an option state the type of option (call/put), the total number of shares, strike price, the expiry date of the contract

The option’s price, generally called Premium, depends on the expiry date, the strike price, and the stock’s instability.

Investors use options to hedge risk in the equity market.

 

2. Futures:

This is a contract between two parties, where the buyer agrees to buy, and the seller agrees to sell the underlying equities at a contract price on a pre-specified date in the future.

Purchasing futures derivatives bonds the trader to an obligation, where the buyer must and should purchase shares of the stock on the date as per the futures contract. The seller is also obligated to sell on the specified future date.

 

3. Warrants:

This Grants rights to the holder to buy the underlying stock at a specific date in the future, but there is no obligation. These are issued by companies and not investors. Warrants are offered to those who hold stocks and bonds of a company. Investors can exercise warrants to call or put (buy or sell) shares at a particular price, which is much higher than when the warrant was issued.

4. Equity Swaps:

This is an agreement between two parties to exchange cash flows, one of which comes from an equity index, while the other is bonded to the index or stock’s return. Equity swaps are generally used to keep away from transaction costs connected with the buying or selling of stocks and provide the investor with a cash flow similar to the returns of any other stock.