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Derivatives

  Derivatives   |   Terms
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  • July 23, 2020
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Linear Payoff

The payoff of a derivative contract that moves one-for-one with changes in the underlying price or rate. In general, derivatives subdivide into two common types: one that is patterned on forwards and one that is based on options. Derivatives patterned on forwards have linear payoffs. Such contracts are relatively easy to discern, valuate, and manage. For example, the payoff of a futures contract will increase by one dollar, from the buyer’s perspective, when the underlying asset increases one dollar.


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