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WHAT ARE DERIVATIVES?

Derivatives are not a separate asset class but are contracts usually giving a commitment or right to buy or sell assets subject to specified conditions, for example on a set date in the future and at a set price.

The value of a derivative contract can vary. Some derivatives can have large increases/decreases in their value over a short period of time, while others may be more stable. The value of some types of derivative can even move in the opposite direction to a particular market.

Derivatives can generally be used with the aim of enhancing the overall investment returns of a fund by taking on an increased risk, or they can be used with the aim of reducing the amount of risk a fund is exposed to. So, they are often used by fund managers for different reasons.

The value of derivatives may vary more than an investment in shares, fixed interest securities, cash, or property.

If one of the parties in a derivative contract suffers financial difficulty, this may lead to them not being able to make some of the payments they owe. This can affect the value of a fund invested in derivatives.

IF YOU NEED INVESTMENT ADVICE PLEASE CONTACT AUTHOR Elliott Wilson ACSI DipPFS AF3

 

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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