What is a negotiable security and how are they related to derivatives?
"As Dheer pointed out, Wikipedia has a good definition of what a negotiable instrument is.  A security is an instrument or certificate that signifies an ownership interest in something tangible. 1 share of IBM represents some small fraction of a company. You always have the ability to choose a price you are willing to pay -- which may or may not be the price that you get. A derivative is a level of abstraction linked by a contract to a security... if you purchase a ""Put"" contract on IBM stock, you have a contractural right to sell IBM shares at a specific price on a specific date. When you ""own"" a derivative, you own a contract -- not the actual security." The price for securities is negotiable.  You totally have a right to make a lower offer when buying or ask for a higher price when selling.    Securities don't trade at a fixed price, the price goes up and down throughout the day based on the price offers made by buyers and sellers and where they find agreement. If a stock last traded for $10, someone can put out an offer to buy the stock at $9.50, if they find someone who wants to sell and will accept that price, then a deal is made. unless something is falling rapidly in price however, an offer that far below the last price is not terribly likely to be accepted. Now if you want to be assured of making a sale or purchase, you generally trade 'at the market' and for small time players that is very much encouraged as it makes it easier for everyone. "negotiability is a legal concept that permits free transfer of a security without the requirement of prior consent of the issuer.  that means the issuer must pay the current holder of the security, irrespective of who he is.  negotiability also protects a good faith buyer of the instrument from adverse ownership claims of purported prior holders of the instrument.  it is not related to ""negotiating"" the price or whatnot.  A negotiable security means the current owner does not have to be concerned about acquiring the asset via a bad chain of title b/c he can always assert that he is a ""holder in due course"" defense against such claims, and have absolute security in his ownership right over the asset.  securities and derivatives are different.  securities are transferrable instruments representing a direct claim on the issuer for the value of the security, whether debt or equity ownership.  derivatives are bilateral contracts, which can only be entered into with the consent of both parties, and can only be transferred by such consent.  derivatives represent a claim against the parties of to the derivative that depends on some economic reference which is outside of the financial condition of the two parties to the contract, such as interest rates, FX rates, commodity prices, etc."
Context: assessed project as part of a tech internship in an investment bank, working in small groups, task: to design an app using a financial solution that has an ethical impact.  We came up with (what I hope) is the smart sounding idea of an app for impoverished farmers in developing countries who lack the information and market access that larger or unionised farmers would have. The app would use some kind of decision tree (which may grow with machine learning) to assess the best kind of crops to grow given the region and local conditions for max profitability, and would provide access to some kind of derivatives market, and insurance, allowing the farmers a consistent income.  Struggling with the specifics of how the business/finance side of things would work. Let's assume the bank builds the app and puts it on the app-store as part of some charitable initiative. 1) Would the farmers go directly to the bank to price and purchase derivatives on their crops? 2) Options/futures/forwards - which is most appropriate, or would it make sense to offer all three? 3) Is there any way this could be adjusted to provide regular payments, with a lump sum at the end? Would this be something the bank chooses to do, or is there an existing financial instrument for this kind of setup? 4) How does this tie in with the commodities markets (or is that what the derivatives already are?) 5) Probably a long-shot but any chance of know-your-customer implementations for countries with terrible infrastructure?  6) (probably a dumb question) Say the farmer sells an option on his crops, would this be sold directly to the bank or a 3rd party who'd be more interested in actually buying the crop? Or is this a far too simplistic view? Basically who would the farmer actually deliver the crops to? 7) Any other issues/oversights? Any ideas to make this sound somewhat viable?  It doesn't have to strictly be realistic in any sense, but it also can't be flat-out incorrect!  tyvm in advance, edited to make questions clearer "It's not at all different from anything that happens in reality. Everybody deals with risk and uncertainty, everybody worries about the future, and everybody puts their best mind to bear on it. You gamble, you hedge your bets, you try to do your best with what you've got and what you're willing to give up. People who aren't in the financial industry can also think about their goals in a fine-tuned, strategic, mathematical way. Being able to accurately model reality is useful for pretty much everything.  The way in which it is actually totally different is not addressed. People who deal in derivatives can do a very precise job of predicting the future. So can astronomers, bullfighters, and migratory fish. The difference is that people who deal in derivatives have the ability to leverage reality to obtain a preferred future reality in a uniquely influential way. The guy is acting like investment banks live up on a mountain and look at tea leaves and send down memos about securities once a year.   &gt;Changing the shape of the graph is in some loose sense the business of the financial system, particularly the big investment banks, which are sometimes thought of as ""dealers in risk.""   So are drug dealers. But the guesses investment banks make about the future affect the actual future of investment banks in a way that isn't available to, say, cobblers, so they are dealing with much less of their own risk than most people.   &gt;Buying and selling derivatives means consciously trafficking in risk and uncertainty, in a relatively uncut form. This makes it interesting to people who don't buy or sell derivatives for a living, but who are curious about risk and uncertainty.  It also makes it interesting to people who are curious about why their lives are affected by the the risk and uncertainty of people who trade in derivatives." I cannot explain how the derivative is created in specific, because I have never actually built one. However, [Investopedia](http://www.investopedia.com/terms/m/mitts.asp#axzz1wwZTADu5) suggests to me that the concept is quite simple. They are selling a synthetic protective put.   An individual could quite easily remake the payout structure of these securities -  1. Buy the share or index in which you are interested 2. Buy a put option on the same asset with a strike price as your purchase price 3. If you are interested in the target-term aspect, you ought to buy European puts. American options will be more expensive, but give you more flexibility to sell your share. 4. At the maturity of your option, if the share is below the price you paid you can exercise your option and still have your principal. If it is above, leave your option alone and sell your share for profit. I understand what you're asking for (you want to write options ON call options... essentially the second derivative of the underlying security), and I've never heard of it. That's not to say it doesn't exist (I'm sure some investment banker has cooked something like this up at some point), but if it does exist, you wouldn't be able to trade it as easily as you can a put or a LEAP. I'm also not sure you'd actually want to buy such a thing - the amount of leverage would be enormous, and you'd need a massive amount of margin/collateral.  Additionally, a small downward movement in the stock price could wipe out the entire value of your option. Look into commodities futures & options. Unfortunately, they are not trivial instruments. Let's start with a definition: A Collar is a protective strategy for a position in the underlying instrument created by purchasing a put and selling a call to partially pay for the put option purchased or vice versa. Based on that definition, there are two different types of collars. Each is a combination of two simpler strategies: References Multi-Leg Options Orders Futures contracts are a member of a larger class of financial assets called derivatives. Derivatives are called such because their payoffs depend on the price of other assets (financial or real). Other kinds of derivatives are call options, put options. Fixed income assets that mimic the behavior of derivatives are callable bonds, puttable bonds etc.  A futures contract is a contract that specifies the following: Just like with any other contract, there are two parties involved. One party commits to delivering the underlying asset to the other party on expiration date in exchange for the futures price. The other party commits to paying the futures price in exchange for the asset. There is no price that any of the two parties pay upfront to engage in the contract. The language used is so that the agent committing to receiving the delivery of the underlying asset is said to have bought the contract. The agent that commits to make the delivery is said to have sold the contract.  So answer your question, buying on June 1 a futures contract at the futures price of $100, with a maturity date on August 1 means you commit to paying $100 for the underlying asset on August 1. You don't have to pay anything upfront. Futures price is simply what the contract prescribes the underlying asset will exchange hands for. As far as I can see, it misses the most important point (from the perspective of a private person), for most derivatives: It's marketing.  There are a bunch of derivatives out there which are ONLY traded by (and actively marketed to) retail investors, no instutional investors or companies. They are complex and, in terms of the combination of risk and reward, inferior to plain-vanilla classic derivatives, which gives the bank a better margin...