Derivative

  

A derivative is...derived. It’s a something taken from something else. Like, a derivative of hot weather is thirst. A derivative of hunger is crankiness. Ya know…that diva thing. A derivative of a 132 QB rating in the NFL is serious wealth. And a derivative of a stock or bond or other security...is a something which derives its value based on the performance of that security.

There are basically two flavors of derivative—put options...i.e. the right to sell a security at a given price over a given time period...and call options, i.e. the right to buy a security at a given price over a given time period. The price of that option is derived from the price of the security.

Example time:

Colonel Electric, the downgraded new version of General Electric, is trading for 25 bucks a share. A derivative of its share price is sold in the form of a call option with a 30-dollar strike price, expiring about 90 days from now, on the third Friday of the end month.

Investors pay a price, albeit probably a small one, for the right to then pay 30 bucks a share for Colonel Electric at any time in the next 90-ish days until that option expires. That call option is thus a derivative of the Colonel Electric primary stock price.

Related or Semi-related Video

Finance: What is a Derivative?23 Views

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finance a la shmoop what is a derivative? well it's derived it's a something taken

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from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]

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hunger is well you know crankiness that's diva thing you get there...

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derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah

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yeah discount double shmoop yeah look for it be on there with aaron

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and a derivative of a stock or bond or other security is a something which

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derives its value based on the performance of that underlying security

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there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]

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sell a security at a given price over a given time period and a call option, ie

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right to buy a security at a given price over a given time period

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well the price of that option is derived from the price of the security and a few

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other factors like strike prices and duration and all that stuff

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colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]

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for 25 bucks a share a derivative of its share price is sold in the form of a

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call option with a $30 strike price expiring about 90 days from now on the

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third Friday of the end of that month well investors pay a price albeit

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probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]

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electric at any time in the next 90 ish days until that option expires making the bet

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that the stock will go well above 30 bucks a share in that time period that

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call option is thus a derivative of the colonel electric primary stock price got

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it if you really want to get personal well here's the ultimate form of

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derivative [Baby laying down]

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