Types of derivatives

The flexibility of derivatives means that they are used for a myriad of different purposes.

The main types of derivatives are:

• • swaps — including interest rate swaps, currency swaps, commodity swaps, and credit default swaps;
• • forwards;
• • futures; and
• • options.

This guidance note explains the key features of each of the above types of derivative.

For more information on these classifications, see Types of derivatives.

Sector-specific derivatives

Some derivatives are specific to certain sectors of the economy. These include:

• • commodity derivatives;
• • energy derivatives;
• • credit derivatives;
• • derivatives in structured finance;
• • equity derivatives;
• • foreign exchange (FX) derivatives; and
• • property derivatives.

This guidance note describes each of the above types of sector-specific derivative.

For more information on these sector classifications, see Sector-specific derivatives.

Total return swaps

A total return (or total rate of return) swap, (TRS), is a method of transferring the credit and market, risk of an asset or basket of assets from one party to another party. It is an over-the-counter, off balance-sheet transaction.

The structure of a TRS resembles a credit default swap (CDS) in many ways, which is why it is typically characterised as a credit derivative, even though it does not share all the characteristics of a typical CDS.

This guidance note describes how a TRS works, as well as who enters into a TRS and for what reasons. See Total return swaps.

Commodity derivatives

Commodity derivative contracts take their value from the underlying price of a traded commodity and require payments to be made or products delivered based on the movement of that price.

This guidance note details common types of commodity derivatives, describes typical users of commodity derivatives, and summarises the European regulation of commodity derivatives.

See Commodity derivatives.

Energy derivatives

Energy derivatives reference the underlying price of an energy source, such as oil, gas or electricity.

This guidance note follows a similar structure to that for commodity derivatives.

See Energy derivatives.

Foreign exchange (FX) derivatives

A foreign exchange (FX) derivative is a type of derivative whose payoff depends on the foreign exchange rates of two or more currencies.

This guidance note describes common FX derivatives and their uses. It also summarises the documentation of foreign exchange contracts.

See Foreign exchange (FX) derivatives.