A derivative is a financial instrument whose performance, characteristics and value depend on (and so are derived from) the performance, characteristics and value of an underlying asset (real or financial), typically a stock, bond, commodity, currency, index, or rate. More specifically, the value of a derivative is dependent on the changes in the absolute value or relative value of the underlying. Futures and options are the most common types of derivatives. These instruments are naturally quite complicated and constitute a great deal of risk, but may also produce huge returns. Other types of derivatives include swaps, forward contracts, and structured/ hybrid products in which a derivative element does exist.

A flow derivative is a “leveraged” securitized product offering that is designed to provide maximum leverage with respect to currency denominations of a set of assets. It also aims to reproduce the payoff patterns of all available over-the-counter forex instruments. The most popular flow derivatives are: warrants (vanilla options), barrier options (WAVEs), synthetic structured forwards (e.g., bonus certificates), leveraged synthetic spot positions (WAVEs XXLs).

Derivatives are based on underlying assets (stocks, bonds, notes, commodities, exchange-traded funds (ETFs), etc.) or variables (such as credit risk, interest rates, volatility, shipping costs, etc.). In turn, flow derivatives are based on the movement of value, with a leveraged exposure. Both types provide a level of leverage (e.g., swap leverage, option leverage, etc.)

With respect to flow derivatives, specific types such as WAVE XXLs allow investors and traders to take “leveraged” views on market direction in an underlying asset (e.g., currencies, indexes, commodities, and in some cases individual stocks), subject to a stop-loss mechanism. The structure has no set maturity, and nevertheless it is equipped with a capital protection feature where the maximum loss to the capital invested cannot go beyond the amount invested.