Digital Derivatives Markets

Derivatives Markets test banks

The term "derivative" covers a lot of territory. Technically, derivatives get their name because they derive their value from the instrument on which they are based. They include swaps, futures and options. This market was estimated to be about $1.2 quadrillion as of September 2012, providing a range of opportunity for finance professionals. Let's take a look at the derivatives market from the perspective of someone who may be considering career opportunities here.

Types of Derivatives
Derivative instruments can be traded either on an exchange such as the Chicago Mercantile Exchange or over-the-counter in a dealer market. The following is a sample of the type of derivatives you commonly encounter:

  • Equity derivatives are often associated with futures contracts on various indexes such as the S&P 500, Nasdaq, FTSE (U.K.), CAC (France) or DAX (Germany).
  • Debt/interest rate derivatives would be the Treasury complex on the Chicago Board of Trade or Treasury bills, eurodollars and interest rate swaps on the Chicago Mercantile Exchange. Contracts for interest rate swaps and credit derivatives are also traded over-the-counter in a dealer market.
  • Foreign exchange derivatives are often the most popular trading opportunities and, as stated above, can be traded either in futures contracts on the Chicago Mercantile Exchange or over-the-counter in a dealer market.
  • Physical commodities derivatives are most often agricultural futures contracts and most recently energy futures contracts.
  • Option contracts are traded on everything you can imagine from cash stocks to futures contracts.
What to Do?
People outside the business have a great many misconceptions about the jobs and career paths available to them on the sell side of the investment business. Generally, there are four venues in which one could start:
  1. Sales
  2. Trading
  3. Analytics
  4. Back-Office
Sales
The public is most familiar with sales people or brokers. Salespeople are responsible for bringing in clients (and their assets) and transacting their business. Salespeople are not paid to be market gurus or prophets, although it certainly helps if you can guide your clients toward making good decisions. Within the sales function, there are two very broad categories: retail and institutional.

Retail
The typical retail derivative client is almost certainly a "spec" (or speculative) account. In these accounts, investors place trades (usually in futures contracts) for the sole purpose of making a capital gain on their positions. The burnout rate is quite high, so constant solicitation for new clients is a mainstay of the job.

Institutional
Institutional accounts are almost always using derivative instruments to hedge a position in a corresponding cash security. The consequence of this is that while it's more difficult to gain their business, these clients tend to have a considerably longer tenure.

Trading
Traders are the people who trade the actual instrument, whether over-the-counter or on an exchange floor. Traders are charged with the responsibility of "making a market". This means making competitive bids (if the client is selling) or offers (if the client is buying). Traders often have an "inventory" or positions in order to make a liquid market for clients.

Analytics
Analysts are the people who forecast future events or analyze current ones for their effect on the markets. You probably have seen research reports on any number of items from bonds to stocks to foreign currencies or physical commodities and the analysts' subsequent forecast on possible outcomes and interaction between various sectors of the markets.

Back-Office
Back-office people include everything from compliance officers to accountants. Your personality type will determine what position appeals to you most. People in these positions, while having similar educational backgrounds, have very different psychological make-ups. How extroverted, introverted and cerebral you are plays a crucial role in what position would suit you best and would be offered to you.

Who to Work For

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