A Beginner’s Guide to Derivatives
Right now, the crypto markets are volatile. They are dominated by speculation on currency at any given moment in time. There are few mechanisms in place to help stabilize the market.
Firmo enables derivatives like futures, options, and swaps to securely exist in the crypto economy. Derivatives tie individuals up in contracts over a period of time. As a result, the risk of owning or selling an asset is distributed over time. When time no longer becomes the primary factor for determining prices in the market, we see more stability and advanced applications for peer-to-peer transactions.
But what is a derivative? It’s a security for one, which acts as a catch-all term for many kinds of investments including stocks, bonds, and mutual funds. Securities are intangible investments. A candy bar is not a security, but buying the stock of the candy bar manufacturer is.
Derivatives are also securities, or intangible investments. Their value is derived from the price performance of the underlying entity. This underlying entity could be an asset, index, or interest rate and is most commonly referred to as the “underlying.”
Derivatives have a wide range of purposes from insuring against price movements, increasing exposure to risk, and providing access to hard-to-trade assets or markets.
The more common and well-known derivatives are futures, options, and swaps. We’ll go over a definition of each in this article.
What is a future?
A futures contract (or futures) is a legal agreement to buy or sell something at a pre-determined price at a specified time in the future. The asset transacted is usually a commodity or financial instrument.
What is a swap?
A swap is a contract by which two parties can exchange financial instruments. In swaps, one financial instrument is generally fixed while the other is variable. These instruments can be almost anything, but most commonly are seen as interest rate swaps.
What is an option?
An option is a contract created between a buyer and the seller of an asset, which gives the the holder of the asset in question the option, but not the obligation to purchase (or sell) the asset. See an example of an option here.
Firmo makes it possible for derivatives to be securely deployed as smart contracts on the blockchain, removing many of the intermediaries currently involved in the creation of derivatives today. This is done through FirmoLang, our formally verified domain-specific language.
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