Expert: Doug Ingram - 10/10/2008

Question
Can you provide me with some examples of what derivatives are?  I understand it is something where the value is derived from something else.  When someone states they are purchasing derivatives to hedge risk, what are they referring to?  When you say purchase a derivative, what are you actually purchasing?  Thank you so much for your time.

Answer
I didn't reject this question intentionally - I pressed the wrong button.

Derivatives represent a very broad base.

They can be as simple as the interest or principal of a bond that is split into those pieces.

Another angle is to take mortgages and split them into pieces (CMOs).
The 30 (or 15 years) of principal and interest can be sectored into short, medium, and long pieces.  They can even make bonds with a fixed coupon have a variable rate by creating an opposing piece that has an inverse coupon that pays a higher rate if rates fall.

They can be a bank that has too much fixed debt doing an interest rate swap with a bank that has too much floating rate.

There are dozens of types.