How the Trading Floor Really Works

CHAPTER 10

What’s So Special About Trading Derivatives?

This chapter will distinguish between cash traders and derivatives traders. A cash trader is the general term for a bond or equity trader, in other words a non-derivatives trader. Simply put, the cash trader buys a product, for example a stock or a bond, from one client and then sells the same product to another client or another bank. At the end of that process, the cash trader is left with no residual risk. The derivatives trader, on the other hand, does not have the luxury of no residual risk. A derivatives trader enters into a contract with a client and then tries to replicate the equal but opposite contract with another client or bank. This is generally impossible to do as most clients ...