Glossary — M01: Derivative Instrument and Market Features
Term
Definition
Derivative
A financial instrument whose value is derived from the performance of an underlying asset, index, rate, or event
Underlying
The asset, rate, index, or event from which a derivative’s value is derived (e.g., stock, bond, commodity, interest rate)
Spot (cash) market
The market for immediate delivery and settlement of the underlying asset
Spot price
The current market price of the underlying asset for immediate delivery (S0)
Derivative market
The market where derivative contracts are created, traded, and settled
Over-the-counter (OTC)
A decentralized market where derivatives are privately negotiated between counterparties, allowing customized terms
Exchange-traded derivative (ETD)
A standardized derivative contract traded on an organized exchange with clearinghouse guarantee
Clearinghouse (CCP)
A central counterparty that interposes itself between buyers and sellers, becoming buyer to every seller and seller to every buyer, thereby managing counterparty risk
Novation
The process by which the clearinghouse replaces a single bilateral contract with two contracts — one with each counterparty
Counterparty risk
The risk that the other party to a derivative contract will fail to fulfill its obligations
Initial margin
The deposit required to open a derivative position, serving as a performance bond
Maintenance margin
The minimum margin balance that must be maintained; falling below triggers a margin call