Definition: Equity-linked derivatives

External debt - IMF

Derivatives whose value derives from equity prices. These include: 

• Equity future—traded on an organized exchange, in which counterparties commit to buy or sell a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on a specified date; 

• Equity option—gives the purchaser the right but not the obligation to purchase (call) or sell (put) a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on or before a specified date; and 

• Equity swap—in which one party exchanges a rate of return linked to an equity investment for the rate of return on another equity investment. 

Net cash settlements are usually made.