Derivative security


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Derivative security

A financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Derivative Security

Futures, forwards, options, and other securities except for regular stocks and bonds. The value of nearly all derivatives are based on an underlying asset, whether that is a stock, bond, currency, index, or something else entirely. Derivative securities may be traded on an exchange or over-the-counter. Derivatives are often traded as speculative investments or to reduce the risk of one's other positions. Prominent derivative exchanges include the Chicago Mercantile Exchange and Euronext LIFFE.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
H7: The use of a derivative security will precede poor stock price performance.
Since the derivative security is valued relative to its underlying asset, and can be replicated to form a risk-free hedge, it must have the same value in actual financial markets as in a risk-neutral world.
The valuation equations for a derivative security in the presence of information costs
(1) The theoretical pricing model is inadequate or inaccurate, which implies that the observed market price may very well be the true price of the derivative security, or
A derivative security has contractually determined payouts that can be described by functions of observable asset prices and time.
The value V of a derivative security whose underlying stock has current price S, dividend yield [D.sub.0], volatility [Sigma], and risk-free interest rate r satisfies the equation: [differential]V/[differential]t + 1/2 [[Sigma].sup.2] [S.sup.2] [[differential].sup.2]V/[differential][S.sup.2] + (r - [D.sub.0] S [differential]V/[differential]S - rV = 0 Analysts ensure the accuracy and efficiency of models, but because they are highly trained and compensated, they make very expensive programmers.
They introduce the notion of temporal granularity for continuous-time stochastic processes, which allows them to quantify the extent to which discrete-time implementations of continuous-time models can track the payoff of a derivative security. They show that granularity is a function of the contract specifications of the derivative security and of the degree of market completeness.
For those acquired or entered into before this date, the taxpayer can avoid mark-to-market treatment if it establishes unambiguously that the NPC or derivative security was acquired other than in the taxpayer's capacity as a dealer in such securities.
FFIEC should allow the institution to rebut this presumption if it can demonstrate that, when compared to total portfolio investments, the derivative security reduces total portfolio interest rate risk.