Education Center Topics:
- What Does a Prime Brokerage Provide?
- Prime Brokerage Financing - The Financial Services They Provide
- Global Securities Lending - How Does It Work?
- Global Execution Services - What It Is and How It Works
- Technology & Client Reporting - The Tools of the Trade
- Capital Introduction - The Basics of How It Works
- Services a Good Broker Should Provide
- The Importance of Having a Solid Balance Sheet
- Derivatives Expertise - What a Good Broker Needs to Know
- What can PRIMEBROKERAGE.NET do for you?
Prime Brokerage Derivatives Expertise - What a Good Broker Needs to Know
A broker needs to have a good deal of prime brokerage derivatives expertise in order to be able to manage all of their clients' funds properly.
A derivative is simply the collective term given to numerous financial instruments. There are other instruments called the underlying and it is from these that derivatives derive the value they are worth. Derivatives are commonly broken up into different categories based on various factors. Some are based on the connection the derivative has with the underlying. Another group is categorized by what type of underlying is there. One group is separated based on which market the derivative is traded in. And finally the last group is categorized by what kind of pay off profile the derivative has.
Prime brokerage derivatives expertise is needed for other reasons as well. Derivatives can be grouped into two additional categories as well. The most common type of derivative, and the simpler one, is known as a vanilla derivative. The other category is more specialized and complicated than the vanilla group and these are known as exotic derivatives. Brokers just have to use their own formula and ways of telling them apart, as there are no rules set in stone for how to tell them apart from each other.
For clients that trust their money being handled by the broker, prime brokerage derivatives expertise allow them to be able to do many things. A client can use them to gain leverage, which is when one uses debt to enhance their investment portfolio. This practice is done merely to get a greater return on their stock investment. Doing this, however, can not only lead to significant increases in stocks, but can also cause significant decreases as well. Derivatives can also be used for speculation. This allows an investor to gain a profit if they predict the value of the underlying asset and that value actually moves in the same direction they predicted it would.
Prime brokerage derivatives expertise can also come in handy for those investors who want to hedge. This simply means that the risk of the underlying is lessened. A client can also use the expertise of their broker to gain exposure for the underlying in places where it can't be traded. Another things investors might use their prime broker's knowledge for is generating optionality. This just means that derivative's value will now be linked to certain conditions or a specific event. This even may be something like the underlying hitting a certain price point.