NZX Derivatives Adviser key terms

A financial contract whose value depends on an underlying asset, rate, index or event rather than being a direct claim on it. Common forms include futures, options, forwards and swaps.

The asset, index, interest rate, currency or other reference from which a derivative contract draws its value. Settlement and pricing of the contract are tied to movements in this reference.

A standardised, exchange-traded agreement to buy or sell a defined quantity of an underlying at a set price on a future date. Both parties are obligated to perform and the contract is cleared centrally.

A contract giving the buyer the right, but not the obligation, to buy or sell an underlying at a specified price on or before a set date. The buyer pays a premium for that right.

A privately negotiated agreement to exchange an underlying at a fixed price on a future date. Unlike futures, terms are customised and the contract carries counterparty credit risk.

An agreement in which two parties exchange cash flows calculated on different bases over a set period. Interest rate and currency swaps are common, and one leg is often floating.

The set of standard terms defining an exchange-traded contract, including contract size, deliverable grade, expiry date, tick size and settlement method. Advisers must check these before recommending a product.

The smallest permitted price increment for a quoted contract. It converts into a fixed minimum value per tick, which is used to calculate profit, loss and hedging outcomes.

The date on which a derivative contract ceases trading and settlement obligations fall due. After expiry the contract no longer exists and any position is closed or delivered.

Closing a position in an expiring contract and opening an equivalent position in a later-dated contract. It maintains exposure but creates trading costs and possible basis differences.

The fixed price at which an option holder may buy or sell the underlying. Whether the strike sits above, below or at the market determines the option's moneyness.

The price paid by an option buyer to the seller for the rights conveyed by the contract. It comprises intrinsic value plus time value and is the maximum loss for a long option holder.

The amount by which an option is in the money, being the difference between the strike and the current underlying price. It is never negative and excludes any time value.

The portion of an option premium attributable to the chance the option becomes more valuable before expiry. It erodes as expiry approaches, all else equal.

A description of where the underlying price sits relative to an option's strike: in the money, at the money or out of the money. It indicates whether exercise would currently be profitable.

A measure of how much an option's price changes for a small move in the underlying. It also approximates the equivalent underlying position and is used to size hedges.

The rate at which an option's delta changes as the underlying moves. High gamma means a hedge must be rebalanced more often, raising hedging risk near expiry.

The change in an option's price for each day that passes, holding other factors constant. It quantifies time decay, which works against long option holders.

The sensitivity of an option's price to a change in implied volatility. Long options gain when volatility rises; short options lose.

The volatility level that, when entered into a pricing model, reproduces the option's observed market price. It reflects market expectations and shifts with supply and demand.

A backward-looking measure of how much an underlying's price has moved over a past period, usually as the standard deviation of returns. It is compared with implied volatility to judge option value.

The net cost of holding an underlying until delivery, covering financing, storage and insurance less any income received. It links spot and futures prices through the no-arbitrage relationship.

The difference between the spot price of an underlying and the price of a related futures contract. Basis converges to zero at expiry and drives hedging effectiveness.

The risk that the relationship between a hedge and the hedged exposure changes unexpectedly, so the hedge does not offset losses precisely. It arises from maturity, quality or location mismatches.

A market condition where futures prices are higher than the spot price, typically because of positive cost of carry. Positions rolled forward in contango can lose value over time.

A market condition where futures prices are lower than the spot price, often reflecting strong current demand or convenience yield. It can benefit holders who roll long positions forward.

The collateral a clearing participant or client must deposit when a futures position is opened. It acts as a performance bond and is not a down payment on the underlying.

Daily cash payments that settle the change in value of open positions, calculated through mark to market. Gains are received and losses are paid, keeping collateral aligned with exposure.

The daily revaluation of open positions at the official settlement price. Resulting gains or losses are credited or debited to margin accounts.

A demand for additional collateral when an account's equity falls below the required maintenance level. Failure to meet it can lead to forced liquidation of positions.

The minimum account equity that must be maintained while a futures position is open. Falling below it triggers a margin call, usually restoring the account to the initial level.

An entity that interposes itself between trade counterparties, becoming buyer to every seller and seller to every buyer. This novation reduces counterparty risk and supports multilateral netting.

The legal process by which a central counterparty replaces the original bilateral contract with two new contracts, one with each side. It is the mechanism that removes bilateral counterparty exposure.

The post-trade process of confirming, netting and guaranteeing transactions, and managing margin and settlement obligations. It stands between execution and final settlement.

The completion of a transaction through delivery of the underlying or payment of a cash amount. Futures may settle physically or in cash depending on contract terms.

Final settlement of a derivative by payment of the difference between the contract price and a specified reference price, rather than by delivering the underlying. It avoids physical delivery logistics.

The risk that the other party to a contract fails to meet its obligations. Exchange-traded derivatives largely mitigate it through clearing, while over-the-counter contracts retain it.

The proportion of an exposure covered by derivative positions, often expressed in contracts or delta terms. It determines how much of the underlying price risk is offset.

The clear provision of information a client needs to understand a product, its risks and costs before deciding. It must be timely, accurate and not misleading.

The assessment of whether a derivative is appropriate for a particular client given their objectives, financial situation, experience and risk tolerance. It underpins the advice process.

The process of gathering and verifying information about a client's circumstances, goals and risk appetite. It provides the factual basis for suitability assessments and ongoing advice.

A client's willingness and financial capacity to accept losses or volatility in pursuit of objectives. It shapes which products and position sizes are suitable.

A regulated document summarising a financial product's key features, risks, fees and dispute resolution arrangements. It must be given to retail clients before they acquire the product.

Conduct that creates a false or misleading appearance of trading activity or price, such as wash trades or spoofing. It undermines market integrity and is prohibited.

A transaction where the buyer and seller are effectively the same party, creating apparent volume without genuine change in ownership. It is a form of prohibited market manipulation.

Trading or tipping others to trade on material, non-public information in breach of a duty of confidence. It is illegal because it undermines fair access to markets.

Situations where an adviser's or firm's interests could improperly influence advice or dealing. They must be identified, disclosed and managed so client interests come first.