Equity derivatives are a class of financial derivatives instruments whose value is related to the performance of individual stocks, indexes, exchange-traded funds or bespoke stock baskets. The instruments are actively traded over exchanges as well as over-the-counter.
The class is broadly split into two categories: delta one instruments – such as index futures, single stock futures, forwards and total return swaps – whose value moves with a linear relationship to the underlying assets; and convex or non-linear products – such as options, variance swaps and volatility swaps – whose value is derived, at least in part, from the volatility of underlying assets.
Equity derivatives can be used to hedge risk in stock portfolios or speculate on moves in indexes and single stocks. They can also be used to trade other equity parameters such as volatility and dividends.
Options represent almost 60% of the OTC equity derivatives market, according to 2016–2017 data, with the remainder split between forwards and swaps.
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