Derivative Product Basics

Investment in derivatives involves risks. Investors should understand the nature of the products before they make investment decisions. The video training is intended to provide you with general knowledge of derivatives. The video consists of 4 parts and you can select the specific part by clicking on the corresponding link.

Derivative Product Basics

Part 1 - Introduction to Derivatives

Part 2 - Common Types of Derivatives

Part 3 - Applications of Derivatives

Part 4 - Key Risks Associated with Derivatives

Some Key Risk of Derivatives

Derivatives are issued by third parties, such as listed companies or financial institutions, which are usually referred to as "issuers". If these organizations encounter financial problems, leading to a decrease in their credit rating, or if they collapse because of solvency problems, the derivatives' values will be affected and may even lose all value.

Derivatives' prices depend on the value of their underlying assets. Normally, fluctuations in the underlying assets' prices will affect derivatives' prices directly. This is the Investment Risk of the Underlying Asset.

Regardless of whether the investor chooses to redeem early, or the issuer has to terminate the products because of early redemption, these actions may cause the investor to lose money because they may receive an amount less than what they have invested. Therefore, you should pay attention to the early redemption provision, and consider if it would affect the amount you invest.

Generally speaking, this risk is related to whether or not the derivatives can be easily sold and converted into cash. Before the expiry, some derivatives may be harder to sell and convert into cash. If it is not possible to sell them, you will have to wait until the derivatives expire before you can get your funds back. You should pay special attention to the liquidity risk if you need to use these funds at any time.

Any derivative will ultimately be exchanged for an "asset" and "money", or exchanged between two currencies. The fact is that "money" is necessarily linked to interest rates; therefore, interest rate changes will definitely affect the values of derivative products.

Consider that a small movement in the stock market (or foreign exchange market) may exhibit more drastic change in a derivative's price. This is the Leverage Risk. The higher the gearing ratio the higher the leverage risk.


This webpage is for information purpose only and does not constitute any offer or solicitation or advice to buy or sell any investments. Investments are not bank deposits and are not obligations of, guaranteed or insured by Citibank (Hong Kong) Limited, Citibank N.A., Citigroup Inc. or any of its affiliates or subsidiaries, or by any local government or insurance agency, and involve risks, including the possible loss of the principal amount invested. Share prices may go down as well as up. Investment products are not available for U.S. persons and might only be applicable to limited jurisdiction.

Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment.

In the event of any discrepancy between the English and Chinese versions, the English version shall prevail.