A financial instrument called an equity derivative is one whose value is determined by the equity movements of the underlying asset. A stock option, for instance, is an equity derivative since the price movements of the underlying stock determine how much it is worth.
Investors can use equity derivatives to speculate on the price movements of the underlying asset or to hedge the risk associated with holding long or short positions in equities.Financial products known as equity derivatives derive their value from changes in the price of the underlying asset, which is typically a stock or stock index.Equity derivatives are used by traders to speculate and control risk for their stock portfolios.
Equity options and equity index futures are the two main types of equity derivatives. Equity derivatives also include equity swaps, warrants, and single-stock futures.Derivatives on equity may function like an insurance policy. By paying the cost of the derivative contract, also known as a premium in the options market, the investor receives a potential payout. By acquiring a put option, an investor who buys shares can hedge against a decline in share value. Conversely, a shareholder who has shorted shares might protect himself against a rise in the share price by buying a call option.
