Exotic Derivatives

What are exotic derivatives?

Exotic derivatives are types of financial instruments (e.g., futures, swaps, forwards, options, and other agreements) that are made on non-traditional financial arrangements.

Exotic derivatives will typically be chosen by market participants to fit certain needs for purposes of hedging, speculation, or portfolio diversification.

What kind of exotic derivative products are there?

There is a wide range of exotic derivatives that can be traded in the market to fulfill any type of business need, so long as there’s a counterparty willing to take on the risk, such as a bank, hedge fund, or other type of investor.

These types of exotic derivatives have specific payoffs based on certain conditions that need to be reached before they mature.

In the following articles, we explore exotic derivatives in five main categories:

• Energy derivative
• Freight derivative
• Inflation derivative
• Property derivative
• Weather derivative