1
Q
What are the three identifiers to recognise a derivative?
A
1). Existence of underlying asset
- A derivative will typically involve an underlying variable, such as interest rates, fx, commodities etc
2). Settlement mechanism
- Derivatives usually have a settlement mechanism that is different from a regular exchange of principal or interest. Usually involves a net settlement of physical delivery
3). Market price fluctuations impact
- The value of the derivative is sensitive to changes in the market prices of underlying asset
