A derivative is something that comes as an outgrowth of something else. There's a thing, and then another thing based on that first thing that can only exist because the first thing existed.
Take the 2017 Tom Cruise remake of the The Mummy. The movie was supposed to be the launch of Universal Studios' so-called "Dark Universe" franchise. There was going to be a series of movies in a classic monster "extended universe"...the Invisible Man, Dr. Jekyll/Mr. Hyde, etc.
The Mummy flopped. The Dark Universe died for good (probably). But why did the movie exist at all? Well, it was a double derivative.
The Mummy was a remake of the 1930s movies that made a lot of money for Universal back when train travel was the preferred way to get from California to Florida. It also rebooted the 1990s/early 2000s version of the franchise, also a money maker in its time. And the new Mummy movie was an attempt to recreate the success Marvel had with its Avengers-centered cinematic universe. See? Derivative...
So, on to equity derivatives. These are contracts whose value is based on some underlying equity, like shares in a public company. The category includes things like options and futures contracts.
For instance, shares of FullBodyWrap Corp. are trading at $10 and you think they are ready to jump. But you don't want to buy the stock outright. So, instead, you purchase an option to buy 1,000 shares at $12 a share, which expires a month from now. The option gives you the right (but not the obligation) to buy the stock. If shares of FBW rise above $12, you can exercise the option, flip the stock, and book the profit. if it doesn't, the option just expires.
You can also trade the option itself. Someone else might want to buy that right to purchase FBW shares. The price people would be willing to pay are based on where FBW is trading. An option at $12 is pretty cheap if the stock is stuck at $10. But, if the stock rises to $15 a share, the price for that option is going to jump significantly. The value of the option is based on the value of the underlying equity. That's an equity derivative.
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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...