Derivatives Definition | Annuity Digest (page 4)

Derivatives

Derivatives are financial instruments that derive value from an underlying something--be it assets stocks, bonds, interest rates, commodities, real estate, currency, stock market indexes or even the weather. Options, swaps, futures and forwards are examples of derivatives. Derivative provide exposure to an asset without direct ownership of the asset. Derivatives are opaque, complex and in many cases lightly regulated. Professional investors use derivatives to speculate, hedge their bets, lock-in prices or leverage potential returns. For example, a gold futures contract gives you control over thousands of dollars of precious metal for a cash layout equaling a fraction of its total value. Since the 2008 global financial crisis, derivatives have been given bad press. As far back as 2002, Warren Buffett described them as “financial weapons of mass destruction.”

New Derivatives Market Taking Shape with Longevity Swaps

Corporate pension plans face the real risk of having their plan participants live longer than what is projected by actuaries. In other words, similar to an individual who considers an annuity to offset the risk of outliving their assets in retirement, pension plans must deal with longevity risk . A new derivatives market is evolving to deal with longevity risk on an institutional scale. Many of the deals thus far have been between investment banks such as JP Morgan and insurance companies that...

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