Derivative Securities: Synthesis
You have now covered all the major derivative types: options, rights, warrants, futures, and forwards. Here is a framework for distinguishing them on the exam.
Quick Reference: Derivative Types
| 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 |
The Key Distinctions to Remember
- 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 below-market exercise price? Rights
- Which has above-market exercise price? Warrants
- Which has counterparty risk? Forwards (not futures; the clearinghouse eliminates it)
- Who is obligated on options? Only the seller (writer)
- Who is obligated on futures/forwards? Both buyer and seller
- What is futures margin? A good-faith performance deposit, not a margin loan