What are financial derivatives?

Surely you have heard on more than one occasion what financial derivatives are. With the main purpose of investing in these products to increase profitability in your personal or family heritage. But do you really know what these investment models consist of? Well, financial derivatives are products or instruments whose value is based on the price of another asset. The asset on which it depends takes the name of the underlying asset, for example, the value of a future on gold is based on the price of gold. Or in the case of other financial assets, such as raw materials or precious metals, among some of the most relevant.

Whatever the case, they are a very powerful tool to boost profitability levels on investment. But with a special consideration and it is that the operations risk they are significantly higher than through other more conventional financial instruments. Where it is true that you can earn a lot of money, but for the same reason you also leave a lot of euros on the way. This is one of the requirements that you must take care of in financial derivatives operations.

There are as many financial derivatives as there are assets to which they are linked. That is why it is a highly diversified product in financial markets. Because in reality, you have many models where to select from now on. One of the divisions that financial organizations negotiate the most is the one that has to do directly with the type of underlying security. To the extent that it is a product that is offered to drive the low interest rates that are offered at the moment. But with a tremendous risk in its administration, as you will see from now on.

Derivatives: value of the underlying

This selection presents several investment models, among which it stands out especially interest rate derivatives. For this case, it consists of a very special derivative that, as is logical to understand, depends especially on interest rates. Derivatives such as those known as interest rate swaps and whose main utility is based on protecting yourself from possible variations or excess exposure to an interest rate. In other words, if you consider that these important oscillations can occur, you can make these movements profitable with special efficiency. Because capital gains can be higher than through other more conventional financial instruments.

From this point of view, interest rates are more than a variable used to link any line of credit. If not, on the contrary, it serves to make investments from different approaches. Whatever the case, it is one of the options that are becoming fashionable due to the lack of feasible alternatives for get a return on savings. However, it is not a typical financial instrument, the type that many small and medium investors hire. Rather, it is a more sophisticated investor profile.

Forex derivatives

Of course, this is another of the most frequent derivatives in the financial market. Because in effect, its strategy is based on taking advantage of variations in the currency exchange rate The most important. It should not surprise us that these types of derivatives are regularly carried out as options or futures on a currency other than yours or even with two currencies. From the most traditional such as the US dollar or the euro itself to other more exotic such as the Brazilian real, pesos or even the most unsuspected currencies of Southeast Asia.

One of the characteristics of this very special financial derivative is that it makes it possible to obtain very high profits. Of course, under an intensity greater than that of the more traditional financial instruments. Even when for the same reason, you should pay attention that you can also leave many euros for the path of this investment. Therefore, caution It will be the main common denominator of your performances. Above other technical and somewhat fundamental considerations. Through a financial instrument that is becoming popular with retail investors.

Derivatives in equities and commodities

Undoubtedly one of the most sophisticated financial derivatives that you can find right now in the financial markets. Well, in this case it consists of a class of derivatives that depend especially on an asset exchanged on the stock exchanges, for example stocks or bonds. However, many times there are also options on raw materials, such as oil or gold. However, their main drawback is that they are very complicated to operate.

In a way, they are very similar to what options or futures. With very few differences regarding its structure and mechanics to operate with them. Whatever the case, they are much more sophisticated products than the rest and therefore they are not designed for all profiles of small and medium investors. To the point that they make you lose a lot of money in operations from now on. Whatever the case, it is a strategy that you have today to operate in raw materials or even precious metals, as the most relevant financial assets today.

What are the damages?

Trading in financial assets is not suitable for all audiences. But only for a privileged few, not because they are very exclusive investment models. But because the main problem they entail is their complicated understanding. Not surprisingly, you don't even know how to trade these special financial assets. You can create more than one obstacle when opening positions. As a result of this, it is very convenient that from now on you take into account some of its most relevant characteristics, such as those that we expose you below.

• It is a very specific financial instrument that requires prior knowledge of the financial markets where it operates. Don't try to force operations because it will have unwanted effects on your interests as a small and medium investor.
• It certainly has very little to do with buying and selling stocks on the stock market. This is one of the main reasons why they should be included in the same investment category. You think that they are models with many differences and to the point that they diverge in their approaches. To the point that they may not be the most suitable investment models for your characteristics as an investor.
• There is no single derivative, but on the contrary you can select between different derivatives that can be adapted to your user profile. From the investment in precious metals such as gold and silver to seek profitability in the exchange rates of the main world currencies. You have practically no limits to search for content of these characteristics so little explored by large investors.
• If something that establishes these very special financial instruments is undoubtedly the leverage level that has. To the point that they can make you earn more money than in other investment options. But as long as you know how to operate with them, because if not, the risks of contracting them are very high. Not surprisingly, you must ask yourself if it is important to highlight hiring them from now on.

Advantages of financial derivatives

On the other hand, these investment models provide you with benefits that other financial instruments lack. For this purpose, one of the most appreciated lies in the fact that it opens new doors to the world of investment. As you had not imagined from the beginning. Among which also stands out the fact that you can trade any financial asset. As a real option to an unfavorable scenario in the equity markets.

It is also very remarkable that financial derivatives can add value to investments. As long as your financial contributions are not very important. But through complementary operations to the traditional ones. If you operate under these parameters there is no doubt that they could be very profitable operations for your personal interests. Because you will even have models unimaginable a few years ago. As an example, in the cases of derived from CO2 emissions, inflation or any other.

Not surprisingly, it is faced with a very flexible financial instrument that can be adapted to many scenarios and of various kinds. In other words, you can trade a derivative at any time. So that from this dynamic you have more options to make operations profitable from now on. Even though it is not recommended that you relate this product as if it were an investment in equities to use. Because then you would be making a serious mistake that would harm you in your desire to improve your personal or family assets. It is another factor that you should pay attention to to open or undo positions in selected financial assets. Above other more technical considerations.