A derivative instrument whose underlying value is derived from or based on a stock of equity or a stock market index. Some equity derivatives increase in value when stock prices or index values rise; others increase in value when stock prices or index values fall.
An equity derivative allows an investor to transfer risk associated with equity by setting caps on losses incurred on taking either a short or long position in a stock or an index, of course against paying a premium to the protection provider or seller. For example, an investor selling a share of stock can hedge the risk of increasing prices by buying a call option on the same stock. Examples of equity derivatives include options, equity index swaps, stock index futures, convertible bonds, equity-linked bonds, equity index futures options, etc.
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