The payoff of a derivative contract that may move proportionally more or less than the price of its underlying. In general, derivatives subdivide into two common types: one that is patterned on forwards and one that is based on options. Derivatives based on options have non-linear payoffs. Such contracts are quite difficult to discern, valuate, and manage. For example, the payoff of a call option, from the buyer’s perspective, may increase by $5 per each $1 increase in its underlying price.
July 13, 2023