Derivative instruments are financial instruments based on a certain asset (security, market index, commodity or other financial instrument, incl. other derivative asset) called the underlying asset. Characteristic feature of these instruments is that the timing of delivery of the underlying asset is remote in time from the timing of contracting the transaction.
The most common derivative instruments are:
- Futures contracts (futures) is a standardized exchange-traded derivative instrument which requires the buyer to purchase (the seller to sell) a certain asset or a financial instrument at a particular future date and price. Parameters of futures contracts are standardized to facilitate their trade in futures markets. Futures contracts on raw materials are usually with actual delivery of the asset, while those on financial instruments are settled with cash payments. It is typical for trading in futures contracts that they are used to hedge changes in the price of the underlying asset, and purely speculative;
- Unlike the futures contract, the option gives the right but not the obligation of its holder to buy / sell an asset at a specified price during certain period of time. It is used for speculative purposes and to hedge positions. The price of the option is most strongly influenced by its time to maturity and the price of the underlying asset;
- Warrant is a financial instrument that entitles its holder to subscribe for securities until a certain future date at a predetermined price. At the time of issuing the warrant, the current price is usually higher than the price of exercise. Unlike options, warrants have much longer live and are issued by the companies themselves;
- Forward contract is a non-standardized agreement between two parties respectively to buy or sell a certain asset at a specified future date at a pre-agreed price. Forward contract, unlike futures contracts, is not traded on the stock exchange and the parameters of the contract between the two parties are not standardized. With this type of instruments each party is exposed to the credit risk of the counterparty under the contract;
- Swap is a derivative financial instrument and represents an agreement to exchange coupon, currency, interest or other types of payments between two parties as the underlying assets on which obligations are accrued is not exchanged. Payments are in the form of currency flows between the two parties so that the currency and the interest rate risk to be minimized and the future cash flows to better reflect changes in the assets and liabilities of the company. Most swaps are not traded on the stock exchange market.
First Investment Bank offers:
- Purchase and sale of derivative instruments traded on the Bulgarian regulated and OTC market;
- Purchase and sale of derivative instruments traded on the foreign regulated and OTC markets.
- Brokerage contract for financial instruments transactions;
- Financial instrument transaction order;
- Customer categorization document;
- Notification of appropriate service;
- Other documents (you may receive them at the Bank);
- General Terms applicable to contracts with clients of First Investment Bank AD for investment services and activities with financial instruments.
Fees and commissions according to the current Tariff of the Bank are applied.
Signing contracts, giving instructions, orders or requests, and any other legal actions for and on behalf of the client by proxy are allowed only if a notarized power of attorney is presented containing representative powers for carrying out management and/or disposal actions with financial instruments, and a declaration by the proxy that he does not carry out by occupation business transactions with financial instruments.
First Investment Bank AD in pursuance of Art. 10 of the Ordinance on the requirements related to the activities of investment intermediaries and with the objective so the customers, respectively the potential customers can make information-based investment decision, provides a description of the nature and characteristics of the offered and traded by the Bank as an investment intermediary financial instruments and the risks associated with them.
It should be taken into consideration that investment in financial instruments can bring additional risks to investors from unexpected changes in economic and market environment and the investor to take financial and other additional obligations as a result of transactions with financial instruments, including unexpected liabilities, additional to the cost of acquisition of the specific financial instruments.
Investing in financial instruments also bears the risk of losing the entire investment.
Risk related to transactions with derivative instruments
The main risks related to derivative financial instruments are associated with risks that are typical for underlying instruments on which they are based. Derivative financial instruments are exposed to additional, specific for them risks apart from the basic interest rate, currency and price risk:
- Risk of wrong calculation of the derivative - the complexity in designing the instrument, instrument exposition on levels much different from the real ones;
- Risk of leverage effect - depending on the type of derivative financial instrument it is possible to incur losses greater than the amount invested, and to incur losses with minimal variations in the price of the underlying asset;
- Credit risk - especially typical for derivatives traded on the OTC market, where specific conditions are negotiated between the counterparties. In this case either party is exposed to the risk of insolvency of the counterparty;
- Risk of lack of assessment rates - typical mostly for the instruments traded on the OTC market.
Leverage in the field of investment services is the use of different methods of raising debt capital (margin trading) with the purpose to increase the rate of return. Leverage is a way of investing, in which a position is opened allowing the trade of funds exceeding many times the investor’s own funds (deposited funds).
Leverage investment instruments may be options, futures, margin trading and other derivative financial instruments.
The use of leverage involves taking on additional risk, since this type of investment not only increases profits but also possible loss together with low or lack of liquidity can lead to.