What is Financial Derivatives?
Financial derivatives are contracts whose value comes from an underlying asset — equity, debt, currency, commodity, interest rate, or index. They are used to hedge risk, gain leveraged exposure, or arbitrage price differences. The four main families are forwards, futures, swaps, and options.
How It Works
- Forwards: bilateral, customized, OTC contracts to buy/sell at a future price
- Futures: standardized, exchange-traded forwards with central clearing
- Swaps: agreements to exchange cash flow streams (rate, currency, commodity, equity)
- Options: the right but not the obligation to buy or sell at a strike price
- Reported under IFRS 9 at fair value; hedge accounting available with proper documentation
Saudi Context
In Saudi Arabia, banks (SAMA-supervised) offer a full derivatives suite to corporates and institutional investors. Tadawul has begun launching listed derivatives — the Single Stock Futures market started in 2020 and is expanding. Sharia-compliant alternatives (wa’ad-based forwards, profit-rate swaps) are widely used.
Example
A Saudi exporter expecting EUR 50M in three months sells a forward at a fixed SAR/EUR rate to its bank — locking in the receipt today. Whatever the spot rate does, the company knows exactly how many SAR it will receive.