Regulation of equity derivatives

What are equity derivatives?

An equity derivative is a financial instrument that references and offers economic exposure to the performance of an equity asset or other equity-related variable from which the instrument’s price or value is derived.

Equity derivatives may be traded on an exchange or over-the-counter (OTC) (see further details below). They may also be funded or unfunded. Equity derivatives are used primarily by funds and investors as speculative investments and by end users and banks as commercial hedges. However, they also have a variety of other uses which will be covered in further detail below.

Equity derivative instruments fall into the following five principal categories:

1. •

   options—the two main types of options are put options and call options. A put option holder has the right to sell an underlying asset (for example shares) to a counterparty for an agreed price on an agreed