Derivative Instruments

Derivative Instruments

The financial derivatives have been created for companies and institutions can be protected of risks associated to the fluctuations of the prices of underlying assets as interest rates, exchange rate, metals, oil and electric energy. Also, there are some people that use them to speculate.

They have been gradually spread, currently covering a wide segment of the economy, this is due mainly to the depth and liquidity of the financial market, besides to the improvements in the information of prices.

Currently, in Chile the more used are the forward contracts and recently it has been developed the option market and other hybrid variations mixing new instruments according to the requirements of the customers.

As we can see in the following graphic the coverage of forward has grown 182% in the last 5 years, an increase in all contracts maturation period is observed.

Generally, the people that more use these kinds of products are the big or medium companies and institutions, being a bit relegated the little ones, this mainly due to the less information they have or by the costs associated.

Kinds of Derivatives

Forward contract: it is an agreement between two parties, one of them, committed to sell, in a future date, a certain quantity of a product to a determined price, and the other, committed to buy that same quantity at that price. In this case, the objective of the party committed to sell is to assure the amount of money that will receive by its product, so that not to depend on the conditions of the market of the good at the moment of the maturity of the contract. On the other hand, the party committed to buy assures the amount of money that will have to pay to get the good, and in this way do not depend of the market. These contracts can also be used to eliminate the exchange risk, agreeing in this case, the exchange rate between two currencies. In this day, the companies that have accounts to be paid in dollars can be fixed in advance how many pesos they will need to settle them, while the exporters can assure the amount of pesos they will receive when settling the exports return. There could be the possibility that someone, not having the need to buy the good, can be committed to buy in the future, motivated by the expectations the price of the good in the market can be higher to the one agreed, this could be a speculative behavior.

Future contracts: it is a contractual standardized obligation, as well as to buy or to sell an asset, to a determined price, to a defined future date. In a forward contract participates only the buyer and the seller, so the price agreed exclusively depends on the expectations these have regarding the market of the good. When creating a market introducing a lot of agents with the wish