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What does a Derivatives Trader do?

By Justin Riche
Updated Mar 03, 2024
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A derivatives trader typically executes orders involving all types of derivatives, including equity derivatives, credit derivatives, foreign exchange (FX) derivatives and commodity derivatives. If the derivatives trader is working for an investment bank, for example, his or her role might be focused on one of these derivative products. The typical instruments this trader uses are futures, options and swaps. These vehicles can be used to manage risk or for speculative purposes to enhance a firm or an individual's income.

Derivatives are products whose value is derived from actual assets, so the derivatives trader will obviously need to understand these instruments and the assets that he or she trades, as well as the factors that influence their performance. He or she normally will go through derivatives training courses, which are offered from beginner to advanced levels. A professional trader will usually work for a firm or manage funds for clients, but one can find an independent derivatives trader who is competent at what he or she does. This type of trader can make a living from these activities and typically will make his or her trades through futures and options.

In a firm, a derivatives trader might work alongside another trader or a derivatives analyst. The analyst, as the name suggests, will usually analyze the derivative products and assess the potential risk and return associated with them. He or she will help the trader plan and execute trades, will assess the performance of his or her actions and will help the trader correct course when necessary. The trader and analyst are normally required to work within parameters set by their employers or clients. In some cases, especially in smaller firms, the trader will be the analyst as well and will perform all tasks required from both roles.

Depending on the size of the firm, the derivatives trader might need to work with a team of research analysts. These analysts make assessments based on economic news, policies, politics and many other factors that can affect the products that the firm trades. Moreover, compensation for this type of job might be tied to performance; that is, the trader might receive a percentage of the profits generated. Sometimes, the trader might have a base salary and be entitled to receive bonuses linked to performance.

To become a derivatives trader, an individual often will need a strong background in fields such as finance and economics. Candidates who have backgrounds in fields such as engineering, mathematics, computer science and physics have a very good chance with many firms as well, especially those that are inclined to make trading decisions based on computer models. A derivatives trader or even a firm that uses a sophisticated quantitative/mathematical approach when trading derivatives are referred to as "quants."

Many derivative products are listed on exchanges and can be reached, practically, by one and all through electronic platforms. The venture of buying derivatives or selling derivatives usually must go through a derivatives broker. Sometimes, however, there are over-the-counter (OTC) derivative deals, which are normally more customized and between two or more parties. Unlike OTC deals, exchange-traded derivatives are made of standardized contracts.

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