Derivatives
Derivatives are agreements (financial contracts) between two or more parties that base the value from the current market price of an underlying asset such as stocks or commodities. Essentially, the agreements are based on the parties’ expectations of the future price of the underlying asset to make a profit. All derivatives are similiar in nature however, have different terms and obligations. Examples of derivatives include, futures, options, swaps and forwards.
An example of a futures contract is:
- Party A believes the price of a commodity will rise and party B believes the price of the commodity will fall in the future. The parties decide to enter a futures contract where they decide to sell and buy the commodity on a specific date in the future at the current market price the contract was established. Both parties are obligated to fulfil their end of the bargain by the expiry date of the contract.
Investing in Derivatives within an SMSF
It is important to note whether your Trust Deed and Investment Strategy allow for derivative investments. The Trust Deed issued by Superannuation Warehouse specifies that in order to invest in derivatives, a Derivative Risk Statement must be in place.
For a Derivative Risk Statement Template, please click the button below:
For more guidance on SMSF investing, please click here.
