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 nonlinear 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