Quick Answer
Five derivative types share this unit: options, rights, warrants, futures, and forwards. The exam separates them by who issues them, whether the exercise price sits above or below market, how long they last, and whether exercising creates new shares. Anchor each fact to those four questions rather than memorizing the types in isolation.
The table and bullets below are a review pass, not new material. Use them to check that you can answer each distinguishing question cold, without re-deriving it from the individual lessons.
How Do the Derivative Types Compare at a Glance?
| Derivative Type | Issued By | Exercise Price vs Market | Duration | Creates New Shares? |
|---|---|---|---|---|
| Options | Options Clearing Corporation (OCC) | Various | Various | No |
| Rights | Corporation | Below market | 30-60 days | Yes |
| Warrants | Corporation | Above market | 5-10 years | Yes |
| Futures | Exchange | Contract price | Various | N/A |
| Forwards | Private | Contract price | Customized | N/A |
What Are the Key Distinctions to Remember?
- Why "Various" for options' exercise price vs. market? Exchanges list a range of strike prices around the current market price for the same underlying. The trader picks which strike to trade, so a given option can be in, at, or out of the money depending on that choice, unlike rights (always below market) and warrants (always above market), where the corporation fixes the relationship at issuance.
- Why "Various" for options' duration? Exchanges list multiple expiration dates for the same underlying at once, and the trader picks one when opening the position. There is no single fixed length like the 30-60 days for rights or the 5-10 years for warrants.
- Who issues options? The Options Clearing Corporation (OCC).
- Who issues rights and warrants? The corporation itself.
- Which creates new shares when exercised? Rights and warrants, not options.
- Which has a below-market exercise price? Rights.
- Which has an above-market exercise price? Warrants.
- Which has counterparty risk? Forwards, not futures; the clearinghouse eliminates it for futures.
- Who is obligated on options? Only the seller (writer).
- Who is obligated on futures and forwards? Both buyer and seller.
- What is futures margin? A good-faith performance deposit, not a margin loan.
Exam Tip: Gotchas
- "Issued by a corporation" describes rights and warrants, never listed options. The OCC issues and guarantees every listed option; the exam will test whether you know the OCC is not the underlying company.
- Dilution only follows from a new-share issuance. Options never create dilution, since exercise just moves existing shares between two investors. Rights and warrants always do, since exercise pulls new shares from the corporation.
What Should You Check on Exam Day?
- Match each derivative to its counterparty structure first: the OCC issues and guarantees options; the corporation issues rights and warrants; futures trade on an exchange with clearinghouse guarantees; forwards are private, customized agreements directly between two counterparties.
- Rights sit below market and last 30 to 60 days; warrants sit above market and last 5 to 10 years.
- Only rights and warrants create new shares (dilutive); options never do.
- Futures eliminate counterparty risk through the clearinghouse; forwards keep it because they are private, unguaranteed agreements.
- Options place the obligation only on the writer; futures and forwards obligate both sides.