Finance 101 - What are the derivatives? (Binance stock derivatives issue example)

For long time, I was asking myself what are all those derivatives, futures, forwards and options. I had an idea, but was not that clear. As it seems, not even the UK government or the UK media seems to have no idea what is the diference between regulated and unregulated crypto, and what an ETH, a future or a token really is setting them apart from cryptocurrency. They seems to think that all of these are the same, as the recent Binance episode showed us. Regulated crypto derivatives were banned, on some Binance arm called Binance Uk something. But Unregulated crypto, the ones that we know, Bitcoin, Ethereum and so on, were not banned. Yet, everybody panicked reading the newspapers. Just a massive FUD attempt meant to drive BTC price down. Did not work, as crypto experts just laughed and pointed out UK media incompetence. Olny the stock derivatives were cancelled, and life went on as usual.

Back to derivatives, what are they? A derivative is a contract whose value is based on, or derived from, something else (the underlying asset like stock/share for example). They can be used to hedge risk, or to speculate for profit (this was the main issue and all banks wanted to ''protect'' their clients against unnecessary risks. God forbid you may tried to get your money out from the traditional bank and become financially independent.

There are four types of derivatives:

• Forward - a customized contract between two parties, to buy or sell at a specified price at a specified future date;
• Futures - these are heavily regulated and standardized forwards, and the main problem of exchanges, leading to regulators scrutiny;
• Option - a contract that give you the right to buy, but not the obligation to buy (like in the forward contract case), or to sell a security/financial asset;
• Swaps - the exchange of a security for another security.

And with this, I hope I helped you to understand the basic information about derivatives.

All the best,

George

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