Derivatives: Financial instruments that derive their value from underlying securities and other variables, such as indexes or reference rates, have either no or small initial investment and allow firms to speculate or hedge risks that arise from factors outside their control, such as foreign currency rates.
Financial instruments: Assets that can be traded, or they can also be seen as packages of capital that may be traded. Most types of financial instruments provide efficient flow and transfer of capital all throughout the world’s investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one’s ownership of an entity.
Futures: An exchange-traded contract for delivery of a standard equity of a specific underlying asset at a predetermined price and date in future.
Leverage: Gaining an economic exposure that is larger than available capital resources.
Long hedge: Buying a futures contract (e.g. by a commodity consumer) to hedge against a rise in the price of the underlying asset.
Long position: A dealer that has purchased a security is said to be “long” that security.
Net exposure: Net exposure is the difference between a hedge fund’s long positions and its short positions. Expressed as a percentage, this number is a measure of the extent to which a fund’s trading book is exposed to market fluctuations. Net exposure can be contrasted with a fund’s gross exposure.
A fund has a net long exposure if the percentage amount invested in long positions exceeds the percentage amount invested in short positions, and has a net short position if short positions exceed long positions. If the percentage invested in long positions equals the amount invested in short positions, the net exposure is zero.
Option: A contract that gives the holder the right, but not the obligation, to buy or sell and underlying instrument at an agreed price
Put option: An option that permits the holder the right, but not the obligation, to sell an underlying asset at an agreed price.
Short hedge: Selling a futures contract (e.g. by a commodity producer) to hedge against a fall in the price of the underlying asset.