Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on exchanges, both organized and OTC, all over the world. Present-day financial institutions, treasurers, fund and portfolio managers, and even industrial firms and manufacturers directly or indirectly deal in swaps, options, futures, forward contracts, and other types of derivatives. So often, traders and speculators find it more alluring to trade derivatives on assets than to trade the very assets.
The derivatives traded on organized exchanges are standardized instruments that have been defined by the exchanges (like The Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Board Options Exchange, etc) and usually feature standard quantities, delivery dates, and specified underlying assets. In contrast, over the counter markets offer viable alternatives to organized exchanges, and have oversized the exchanged-traded markets in terms of the total volume of trading. Unlike exchange-based trades which are carried out through seat-holding member institutions, OTC transactions are typically made over telephone lines and online connections. Market participants are at liberty in OTC markets to negotiate any mutually beneficial transactions for terms not ordinarily specified by an exchange.
Derivatives are the brainchild of financial innovators and they are just limited by their imagination. In the derivatives section of the Financial Encyclopedia, derivatives, in all their types and flavors, are precisely defined and demystified in a simple, yet professional, manner that would address the needs of both beginners and sophisticated investors (learners and students alike.)