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Handbook of Market Risk by Christian Szylar

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Chapter Eight

Financial Derivative Instruments

One of the differences between UCITS III/IV and prior regulations is its more liberal scope for the use of derivatives—listed or OTC derivatives. The following pages present the most popular financial derivatives being used in funds managed under UCITS. This list is not exhaustive but constitutes the most commonly employed financial instruments that also allow replication of alternative investment strategies. It also worth noting that as part of the next coming AIFM Directive, alternatives may also have to measure leverage using commitment approach. Thus the following pages may also be interesting in the perspective of managing alternative funds.

Listing all financial derivatives including very complex OTC instruments would be a hard task. We cannot list all exotic derivatives that can be used because the financial industry demonstrates a strong innovation capacity in that respect. We have limited ourselves to the most common derivatives that allow us to develop alternative strategies under UCITS (Table 8.1).

TABLE 8.1 List of the Main Financial Derivatives

Forward:Currency forward
Difference:Contracts for difference
Futures:General
Equity futureEquity index futuresBond index futures
Currency futures
Interest rate futures
Bond futures
Options:Currency optionsEquity index optionsBond index optionsEquity optionBond optionsInterest rate optionsOptions on bond futuresOptions on interest rate futures
Swaps:Currency swapsInterest rate ...

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