Welcome back to the QuickFin Dictionary! Providing quick and easy explanations for frequently used finance terminology, today’s topic: Margot’s day in the Life – Derivatives Product Group 

1. Derivative: an asset betting on the rise or fall of other assets (which are the assets that are directly impacted by a company, the government or other direct force)

• an asset that derives its value from an underlying asset (ex. a stock, bond, interest rate or index)
• Common types of derivatives:
  • Options: a derivative giving the right but not the obligation of the option holder to buy (call option) or sell (put option) a security at a specified price at a certain point in time ⇒ allows the option holder to make a profit and never a loss since they are not obligated to exercise the option if they choose not to
  • Futures and Forwards: an agreement to buy or sell an asset at a particular time for a particular price
    • Futures: traded on exchanges, no counter-party risk 
    • Forwards: an agreement between two parties themselves not traded on an exchange, there is counter-party risk (one party may default on their future payment)
  • Swaps: an agreement between counter-parties to exchange cash flows between their respective financial securities
    • Ex. an interest rate swap is an agreement between two or more parties to exchange the interest payments they receive on a certain principal amount (often done between floating and fixed rates so investors can reduce risk from fluctuations in the market)
      • Helps investors work with the type of financing is available to them [some may prefer fixed rates but their bank only provides floating rates] and still be protected against risk
    • Traded over the counter (ie. not on an exchange) and hence be fairly customizable 

Derivative Product Group: (the area in which Margot works), responsible for providing clients in securities a way such that their risks are hedged

Hedge: buying and selling securities and financial instruments to protect the investor from associated risks as best as possible

• Margot stated that they mainly hedged against “interest rate and exchange rate risk” meaning that their department focused on hedging (ie. buying and selling securities for their clients) against these risks in particular
  • Ex. floating rates and their associated risk was hedged using interest rate SWAPS

Institutional clients: clients that are large investors 

• Investors who usually invest on the behalf of others and make large investments 
• Ex. mutual funds, pension funds, investment banks, hedge funds, endowment funds
• Due to the size of their investments, they often have better control in negotiating fees and also have a larger influence on the market
• Comparable to retail investors (essentially everyone other than institutional investors) who generally invest on a smaller scale and not on anyone’s behalf

1. Macro outlook: focusing on the economy at large and its impacts on the general market

• Instead of focusing on an individual and their preferences and choices in the market, or a particular company and its actions, having a macro outlook changes the lens to look at the aggregate market and economic conditions (ex. politics, government policies, imports/exports, technological changes, etc)