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Derivatives

  Derivatives   |   Terms
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  • August 1, 2020
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Non-Linear Payoff

The payoff of a derivative contract that may move proportionally more or less than the price of its underlying. In general, derivatives subdivide into two common types: one that is patterned on forwards and one that is based on options. Derivatives based on options have non-linear payoffs. Such contracts are quite difficult to discern, valuate, and manage. For example, the payoff of a call option, from the buyer’s perspective, may increase by $5 per each $1 increase in its underlying price.


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