The nature of financial derivatives
The nature of financial derivatives

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • The nature of financial derivatives
  • What is a derivative?
  • The underlying reference in a derivative contract
  • Key uses of derivatives
  • Over-the-counter or exchange traded derivatives
  • Cash settlement and physical delivery

BREXIT: As of 31 January 2020, the UK is no longer an EU Member State, but has entered an implementation period during which it continues to be treated by the EU as a Member State for many purposes. As a third country, the UK can no longer participate in the EU’s political institutions, agencies, offices, bodies and governance structures (except to the limited extent agreed), but the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements) and submit to the continuing jurisdiction of the Court of Justice of the European Union in accordance with the transitional arrangements in Part 4 of the Withdrawal Agreement. For further reading, see: Brexit—introduction to the Withdrawal Agreement. This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is a derivative?

A derivative is a type of financial instrument whose value is based upon the value of an underlying asset, index, rate or reference point. Derivatives involve the transfer of risk from one party to another. They can be used to limit a party's exposure to a variable or allow a party to gain exposure to that variable. Many different types