Equity derivative - Financial definition
Concise definition of the term equity derivative
An equity derivative is a financial instrument whose value is based on the price movements of an underlying equity asset, such as stocks or stock indices. These derivatives include options, futures, and swaps, which are used for hedging, speculation, or arbitrage purposes.
Comprehensive definition of the term equity derivative
Equity derivatives are vital tools in the financial markets, allowing investors to gain exposure to equity assets without directly holding the underlying stocks or indices. They are employed in a variety of strategies, such as hedging against market volatility, leveraging positions, or exploiting price discrepancies through arbitrage.
Common examples include stock options, where investors have the right but not the obligation to buy or sell shares at a specified price, and equity swaps, where two parties exchange cash flows based on the performance of an equity index. Market practices often involve complex structuring of these products to meet specific investment goals, such as creating customized risk-return profiles or enhancing yield. Equity derivatives play a crucial role in portfolio management, risk management, and enhancing market liquidity.