Career Development

What Does a Derivative Trader Do?

Find out what a derivative trader does, how to get this job, and what it takes to succeed as a derivative trader.

Derivative traders are responsible for buying and selling financial instruments known as derivatives. These instruments derive their value from the value of other assets, such as stocks, bonds, commodities or currencies. Derivatives can be used to hedge against risk, speculate on price movements, or simply to make a bet.

Derivatives trading is an extremely high-risk profession that requires extensive knowledge of financial markets and strategies. It’s also very competitive—there are only a handful of major players in this field, so competition for jobs is fierce.

Derivative Trader Job Duties

Derivative traders typically have a wide range of responsibilities, which can include:

  • Maintaining records of transactions in order to identify potential risks or opportunities for future trades
  • Participating in meetings with other members of the trading team to discuss trading strategies and new developments in the financial markets
  • Monitoring the performance of existing positions and initiating trades when necessary to ensure that profits are maximized or losses minimized
  • Calculating margin requirements for new trades and making sure that they comply with exchange or regulatory requirements
  • Reviewing market trends to identify possible trading opportunities such as price changes, interest rate changes, or political changes that may affect markets
  • Identifying new investment opportunities by researching companies and industries using computer programs designed for this purpose
  • Setting prices for new derivative contracts based on current market conditions
  • Participating in discussions about the risk associated with particular investments—including possible loss of principal or missed interest payments—in order to determine whether they are suitable for a particular investor’s goals and needs
  • Negotiating settlements with counterparties in the event that a trade goes sour, such as by using a specialist in the relevant industry to help mediate

Derivative Trader Salary & Outlook

Derivative traders’ salaries vary depending on their level of education, years of experience, and the type of derivatives they trade. They may also earn additional compensation in the form of bonuses.

  • Median Annual Salary: $95,000 ($45.67/hour)
  • Top 10% Annual Salary: $205,000 ($98.56/hour)

The employment of derivative traders is expected to grow at an average rate over the next decade.

Demand for derivative products, such as interest-rate swaps and commodity futures, will depend on the demand for the underlying product or service. As long as there is demand for these products, derivative traders will be needed to create them.

Related: In-Depth Derivative Trader Salary Guide

Derivative Trader Job Requirements

A derivative trader typically needs to have the following qualifications:

Education: Most employers require derivative traders to have a bachelor’s degree in finance, economics, statistics or another closely related field. Some employers may hire candidates who have a strong academic background in mathematics, computer science or engineering.

Many derivative traders choose to pursue a master’s degree in finance or business administration to increase their earning potential and qualify for senior positions.

Training & Experience: Most derivative traders will have at least five years of experience in the financial industry. Some will have worked as traders in other sectors, such as the stock market or commodities. Others will have worked as financial analysts or accountants.

On-the-job training is common for new traders. They will learn the specific systems and procedures of their new company and will work closely with senior traders.

Certifications & Licenses: Derivative traders must have a derivatives certification to work on the floor of a futures exchange. Each exchange has its own certification process.

Derivative Trader Skills

Derivative traders need the following skills in order to be successful:

Technical analysis: Technical analysis is the process of evaluating market data to predict future market trends. Derivative traders use technical analysis to determine the best time to enter and exit trades. This involves analyzing market data, such as price fluctuations, to determine the current market trend. Derivative traders use technical analysis to determine the value of a security and the potential profit or loss of a trade.

Communication: Derivative traders often work in teams, so strong communication skills can help them collaborate with their colleagues. They also communicate with clients, so they should have excellent interpersonal skills to build trust and maintain positive relationships.

Risk management: Risk management is the ability to identify and evaluate potential risks and develop strategies to mitigate them. Derivative traders use their risk management skills to make informed decisions about the trades they make. They also use their risk management skills to help their companies avoid financial losses.

Mathematics: Derivative traders use mathematics to calculate the value of financial instruments and the potential risks associated with them. They also use mathematics to determine the value of derivatives and the potential profits they can generate. Mathematics is an essential skill for derivative traders because it allows them to make informed decisions about the financial markets.

Attention to detail: Derivative traders must have excellent attention to detail to ensure they enter the correct information into their trading software. They also need to pay close attention to market trends to identify the best time to enter and exit trades. Attention to detail can also help derivative traders identify potential risks and opportunities in the market.

Derivative Trader Work Environment

Derivative traders work in the fast-paced, high-pressure environment of the trading floor. They work long hours, often 10 to 12 hours a day, and may be required to work weekends and holidays. Traders are under constant pressure to make quick decisions based on changing market conditions. They must be able to handle stress and maintain their composure in order to make sound decisions. Derivative traders need to have excellent math skills and be able to think quickly and clearly under pressure. They must also be able to work well in a team environment.

Derivative Trader Trends

Here are three trends influencing how derivative traders work. Derivative traders will need to stay up-to-date on these developments to keep their skills relevant and maintain a competitive advantage in the workplace.

The Growth of Derivatives

The growth of derivatives is a trend that is having a major impact on the financial industry. This is because derivatives are complex financial products that can be used to hedge against risk or speculate on price movements.

As the use of derivatives grows, so too will the demand for derivative traders. These professionals will be needed to help clients understand and trade derivatives, as well as manage their risks.

More Complex Structures

Derivative traders are facing an increasingly complex landscape as more and more companies turn to derivatives to manage their risk. This has led to an increased demand for derivative traders who can understand and execute these complex structures.

In order to remain competitive, derivative traders need to be able to quickly adapt to changing market conditions and stay up-to-date on the latest trends. They also need to have strong communication skills in order to work with other members of the team.

Greater Regulatory Oversight

Regulatory oversight is becoming increasingly important in the financial world. This is due to the fact that regulators are looking for ways to ensure that financial institutions are following the rules and not taking unnecessary risks.

As a derivative trader, you will need to be aware of the new regulations that are being put in place and how they may affect your trading strategies. You will also need to be able to communicate effectively with regulators in order to ensure that your company is in compliance.

How to Become a Derivative Trader

A career as a derivative trader can be very lucrative, but it’s important to understand that there are many different paths you can take. You could work for a large investment bank or hedge fund, or you could choose to work for a smaller firm or even start your own business.

No matter which path you choose, it’s important to have a strong understanding of the financial markets and how derivatives work. You should also be able to calculate the value of complex financial instruments quickly and accurately. And finally, you need to be able to think creatively about new ways to use derivatives to create profitable trading strategies.

Related: How to Write a Derivative Trader Resume

Advancement Prospects

Advancement prospects for derivative traders are generally good. As they gain experience, traders may be given more responsibility and authority by their firm. In addition, they may be able to move to a larger firm where they can trade more money and make more profits. With enough experience, some traders may even start their own trading firm.

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