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Derivatives




Linear Derivative


An option-related instrument or fixed-income security which features low or no convexity, i.e., its sensitivity changes with the passage of time or with market movement. For instance, swaps are, by nature, linear or quasi-linear derivatives because the second order derivative with respect to the underlying price is equal or close to zero. More specifically, the hedge ratio of a swap is not supposed to change in response to movements in the underlying asset. Other time-dependent linear derivatives include forward contracts and forward rate agreements (FRAs).



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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