what is an exchange traded derivative 
an exchange traded derivative is a financial contract that is listed and traded on a regulated exchange simply put these are derivatives that are traded in a regulated environment exchange traded derivatives have become increasingly popular because of the advantages they have over over the counter otc derivatives these advantages include standardization liquidity and elimination of default risk futures and options are two of the most popular exchange traded derivatives exchange traded derivatives can be used to hedge exposure and to speculate on a wide range of financial assets including commodities equities currencies and even interest rates understanding exchange traded derivativesexchange traded derivatives include options futures and other financial contracts that are listed and traded on regulated exchanges such as the chicago mercantile exchange cme international securities exchange ise the intercontinental exchange ice or the liffe exchange in london to name a few unlike their over the counter cousins exchange traded derivatives can be well suited for some retail investors in the otc market it is easy to get lost in the complexity of the instrument and the exact nature of what is being traded 4in that regard exchange traded derivatives have two big advantages the exchange has standardized terms and specifications for each derivative contract this makes it easier for investors to determine essential information about what they re trading such as the value of a contract the amount of the security or item represented by a contract e g lots and how many contracts can be bought or sold 3individual contracts can be a size that is less daunting for the small investor for instance an investor with limited capital could consider mini options 10 shares on high priced stocks versus standard options 100 shares the exchange itself acts as the counterparty for each exchange traded derivative transaction it effectively becomes the seller for every buyer and the buyer for every seller this eliminates the risk of the counterparty to the derivative transaction defaulting on its obligations 5another defining characteristic of exchange traded derivatives is their mark to market feature mark to market means gains and losses on every derivative contract are calculated daily so on any trading day if the client incurs losses that erode the initial margin amount to a specific level they will have to provide the required capital in a timely manner if they don t their derivative position may be closed out by the firm financial futures are derivatives based on treasuries indexes currencies and more they re often used by financial institutions to hedge long positions held in the underlying security users of exchange traded derivativesall kinds of small retail investors and large institutional investors use exchange traded derivatives to hedge the value of portfolios and to speculate on price movements banks might hedge the value of their treasuries portfolio by taking an opposite position in treasury futures an import export organization might use currency futures to lock in currency rates for impending transactions retail investors might take a position in stock options to hedge the value of their stock portfolios or they simply might want the premium income obtained by selling an option contract most investors are reassured by the standardization and regulatory oversight offered by centralized exchanges however the transparency of exchange traded derivatives may be a hindrance to large institutions that may not want their trading intentions known to the public or their competitors in fact institutional investors might opt to work directly with issuers and investment banks to create tailored investments that give them the exact risk and reward profile they seek 