Maintenance plays a crucial role in keeping various systems and equipment in optimal condition, ensuring their longevity and efficiency. From household appliances to industrial machinery, regular maintenance is essential for preventing breakdowns, reducing downtime, and maximizing the lifespan of assets. This guide aims to provide a comprehensive overview of maintenance practices, highlighting the importance of preventive maintenance, offering tips for effective maintenance scheduling, and discussing best practices for specific systems and equipment.

The Importance of Preventive Maintenance

Preventive maintenance involves regularly inspecting and servicing equipment before any issues arise. This proactive approach helps prevent breakdowns and extends the lifespan of assets. The following paragraphs outline the key benefits and practices of preventive maintenance.

Enhanced Equipment Reliability and Performance

By conducting regular inspections, cleaning, and servicing, potential issues can be identified and addressed before they escalate into major problems. This approach reduces the risk of unexpected breakdowns, ensuring equipment reliability and consistent performance.

Increased Lifespan and Cost Savings

Well-maintained equipment tends to have a longer lifespan. Regular maintenance can help identify and fix minor problems early on, preventing them from causing significant damage and costly repairs or replacements.

Improved Safety and Compliance

Maintenance plays a vital role in ensuring the safety of equipment operators and users. Regular inspections and maintenance help identify and rectify potential hazards, ensuring compliance with safety regulations and standards.

Effective Maintenance Scheduling

Developing an efficient maintenance schedule is crucial for optimal asset management. The paragraphs below discuss key considerations and tips for effective maintenance scheduling.

Manufacturer Guidelines

Consulting the manufacturer's recommendations and guidelines is essential for scheduling maintenance tasks. These guidelines often provide valuable insights into the frequency and type of maintenance required to keep the equipment in optimal condition.

Prioritize Critical Assets

Identify the critical assets within your system and prioritize their maintenance. Critical assets are those whose failure can lead to significant downtime, safety hazards, or substantial financial losses. Allocating more frequent and intensive maintenance to these assets ensures their reliability and performance.

Historical Data Analysis

Analyzing historical data on equipment failures, breakdowns, and repairs can provide valuable insights into patterns and recurring issues. This analysis helps optimize maintenance schedules by identifying periods or conditions when assets are more prone to failure, allowing for Exceptional precision and clarity targeted maintenance interventions.

Balanced Workload Distribution

Distribute maintenance tasks evenly across different periods, considering resource availability and workload capacity. Avoid overwhelming specific maintenance teams or individuals by creating a well-balanced schedule that ensures effective maintenance without overburdening staff.

System-Specific Maintenance Best Practices

Different systems and equipment require specialized maintenance approaches to ensure their optimal functioning. The paragraphs below outline best practices for various commonly encountered systems.

HVAC Systems

Regularly inspect and clean air filters, coils, and ducts to maintain proper airflow and prevent energy wastage. Check and calibrate thermostats, test refrigerant levels, and inspect electrical connections for any issues. Additionally, schedule professional HVAC inspections and servicing annually to ensure peak performance.

Electrical Systems

Inspect electrical connections, cables, and wiring for signs of wear, damage, or loose connections. Test electrical circuits, breakers, and safety devices regularly to ensure compliance and prevent potential hazards. Engage a qualified electrician for any repairs or upgrades required.

Plumbing Systems

Inspect pipes, faucets, and valves for leaks or signs of corrosion. Clean and flush water heaters regularly to prevent sediment buildup. Test water pressure, check toilet flush mechanisms, and inspect drainage systems for blockages or slow drains. Engage a plumber for complex issues or major repairs.

Manufacturing Machinery

Follow manufacturer guidelines for lubrication, cleaning, and calibration of machinery. Regularly inspect belts, gears, motors, and other moving parts for wear or damage. Schedule periodic maintenance shutdowns for comprehensive servicing and inspection of critical components.

Record-Keeping and Documentation

Maintaining accurate records and documentation of maintenance activities is vital for tracking progress, identifying trends, and planning future interventions. The paragraphs below outline the key aspects of effective record-keeping.

Maintenance Logs

Create a centralized system for logging all maintenance activities, including dates, tasks performed, and any issues encountered. This log serves as a valuable reference for future inspections and helps identify recurring issues or trends.

Asset Tracking

Implement an asset tracking system to monitor the maintenance history, performance, and location of each asset. This information enables effective planning and decision-making regarding repairs, replacements, or upgrades.

Documentation of Inspections and Repairs

Maintain detailed records of equipment inspections, repairs, and replacements. Include photographs, diagrams, and any relevant findings or observations. These documents provide a comprehensive overview of the equipment's condition and can help with troubleshooting in the future.

Conclusion

Maintenance is an integral part of managing systems and equipment, ensuring their longevity, efficiency, and safety. By embracing preventive maintenance practices, establishing effective maintenance schedules, and following system-specific best practices, individuals and organizations can minimize downtime, reduce costs, and maximize the lifespan of their assets. Additionally, maintaining comprehensive records and documentation enables informed decision-making and continuous improvement in maintenance processes. By prioritizing maintenance efforts, investing in training, and implementing robust maintenance strategies, individuals and organizations can reap the benefits of a well-maintained system for years to come.

And like all personal choices, we each have our own reasons and rationales for committing to our lifestyle decisions. While some may prefer capsule wardrobes for their simplicity and ease, others might see owning less as a creative challenge. And although one might edit their closet simply to save money, another does so to reduce the harmful environmental and social costs of ownership.

Enter VETTA’s favorite lean closet bloggers, each with their own idiosyncratic philosophies behind their wardrobes. And while it might be intuitive to think minimal wardrobes equate to a single, particular aesthetic, these bloggers' styles range from classic-prep to European tomboy. These women will provide you with capsule wardrobe how-to's, brands to shop, daily outfit inspiration, and most importantly, proof that curating a lean closet is a personal choice worth making.

Caroline Rector of Unfancy
With her "mix and match and repeat" philosophy, Unfancy's Caroline Rector went a full year with only 37 pieces in her closet. While Caroline's structured capsule experiment is over, she still maintains a small closet filled only with intentional purchases and continues to share her clean, classic looks on her site. We love Unfancy because it’s essentially a capsule wardrobe playbook, with piece-by-piece inspiration for any season or special occasion. For those looking to adopt a leaner closet, check out Caroline’s post, "How To DIY a Capsule.”

We asked Caroline why she continues to populate her closet with only the essentials. “I do it because it's calming. It's a way to invite peace into my life, almost like meditation or yoga. It reminds me that I don't have to chase; I can be happy with a lot less. Practicing contentment with something small, like my closet, allows me to get better at it in other areas of my life, too.” For Caroline, keeping a lean wardrobe goes far beyond the clothes themselves. On Unfancy, a capsule wardrobe makes for a calm and clutter-free mind.

Lee Vosburgh of Style Bee
In 2013, Lee Vosburgh began her blog Style Bee (http://www.stylebee.ca), which has evolved into one of the most influential lean closet websites online today. Based in Guelph, Ontario, Lee has gained recognition from fashion influencers like Refinery29 and FLARE for her relaxed-chic style and timeless ensembles. Minimalists credit Lee for the booming popularity of the “10x10 Wardrobe Challenge,” in which participants pick 10 items from their current closet and style those exclusive items for 10 days.

When asked why she keeps a lean closet, Lee tells VETTA, "I keep a lean closet for peace of mind. Having only functional pieces I love to wear makes getting ready a pleasure instead of a dilemma!" Style Bee works to inspire readers to get creative with what they have, reminding us that getting dressed should be both fun and effortless.

Candice Tay
Toronto-based Candice Tay’s eponymous site is one of our go-to blogs for slow-fashion style inspiration, sustainable lifestyle tips and additional resources for building a capsule wardrobe. As she started her own journey to be a more conscious consumer in 2018, she writes that “Beginning this blog has taught me so much about the fashion industry and how detrimental it has been to our earth and to humans in the past decades. I want to be a part of that change”. Her minimal aesthetic shows you that you can create unique looks with a smaller closet. We have found her reviews of slow-fashion brands and categories extremely helpful for making thoughtful, new purchases.

Maria Lee of Gold Zipper
Taking the 10x10 challenge to new heights, Maria Lee wore one simple black dress for one month straight. Although she lives in New York City, Maria's extended capsule wardrobe looks like that of a polished Parisian girl. Her blog, Gold Zipper, aims to be a resource for anyone interested in becoming an owner, rather than a consumer, of clothing. "I believe that we buy more clothing than we could possibly ever need or use,” Maria tells VETTA. “We're so far removed from the lifecycle of a garment from raw textile to landfill that we don't realize the amount of responsibility we assume in clothing ownership.” Maria’s rationale for a capsule wardrobe is two-fold - she’s conscious of the social and environmental impacts of owning an excess of clothing, in addition to keeping a lean closet for stylistic purposes.

Maria also creates stunning, narrative videos in the city, chronicling her outfits and creating deeper, almost philosophical, dialogues around fashion and personal style. “I also keep a lean closet to curate aesthetic unity in my wardrobe,” Maria explains. “I was drawn to this idea because I'm fascinated by personal identity and self-presentation through clothing. When I have a lean wardrobe I know my clothes intimately, and consequently, I feel more comfortable in them."

Andrea Hartman of Seasons + Salt
Passionate about both ethical fashion and capsule wardrobes, Andrea Hartman of Seasons + Salt shares VETTA's mission - and we love it! Encouraging readers to "get off the fast fashion carousel" and think about how and where they get their clothes, Andrea's wardrobe ideology is centered around simplicity and quality pieces. The minimalist-with-a-twist looks on Seasons + Salt will give normcore-lovers new ideas for old pieces.

Andrea also does really helpful product reviews on essential wardrobe staples, like her “Leather Tote Review” where she compares three leather totes from Madewell, FashionABLE, and Cuyana. "For me, a lean closet is a vehicle to define my style, increase simplicity in my life, and buy responsibly-made items," Andrea shares with VETTA.

Deb Shephard of Clothed in Abundance
Deb Shephard encourages her readers to redefine living in abundance by making space and having appreciation for what we have. She covers topics ranging from minimalist fashion, mental health and money, while also providing downloadable worksheets and guides to help you on your journey to capsule wardrobes and minimalist lifestyle. Deb defines minimalism as ‘simplifying your life to live out your core values without societal pressure’ and is a huge advocate for de-cluttering your mind in order to focus on what matters most. We love her daily outfit posts and her 5 x 5 challenges featuring ethical fashion and her thrifted finds.

Allison Karaba of The Thoughtful Closet
With her blog The Thoughtful Closet, Allison Karaba hopes to encourage others to refrain from shopping for the sake of shopping 50+ and start doing more with what's already in their closets. “You don't have to keep buying clothes to evolve your style; sometimes it's just looking at what you already have a little differently,” she tells us. Allison's professional meets industrial aesthetic makes for endless cool girl looks for us to steal. The Thoughtful Closet features Allison's "10x10 Challenge" looks, styling tips, and our favorite -- her holiday guides and wish lists full of simple and versatile gifts and pieces.

From the first time she considered a lean wardrobe to the present-day Thoughtful Closet, Allison walks us through the evolution of her closet philosophy. “I first decided to try living with a minimal wardrobe after I looked at my closet, which was overflowing with clothes, and felt like I had nothing to wear. It was made up of tons of mediocre pieces and I honestly had no idea how to describe my style because everything was so random. I decided to cut down and focus on pieces that I truly loved and go from there. I also wanted to focus on a lean closet to help me with my shopping habits. I would always go shopping if I had a special event or trip coming up. But now with my lean closet I try to look at what I have and create something that feels new. A phrase that keeps floating around is ‘creativity loves constraint’ and I am a 100% believer in that statement.”

Jasmine Hwang of The Pleb Life
In 2017, Jasmine Hwang and her boyfriend Brandon set out to live a more sustainable and ethical lifestyle. Inspired by reducing her wardrobe by 70% in the first year alone, Jasmine uses The Pleb Life to document her on-going journey of building a capsule wardrobe with honesty and authenticity. She is not afraid to redefine her capsule rules, find new ways to implement low-buy/low-spend initiatives and makes an excellent case for having 5 black jumpsuits in her wardrobe. We love her 30x30 challenges, where she selects 30 items to wear for 30 days (including loungewear and shoes!) all photographed in sunny Southern California.

According to Jasmine, "Decluttering is the act of removing unnecessary clutter from your life; while minimalism is the act of living with enough and whatever 'enough' means to you. Minimalism asks you to challenge all the should’s of success and to find your optimal amount of possessions to be happy." We couldn't agree more.

Jessica Doll of Hej Doll
San Francisco blogger, Jessica Doll synthesizes her passion for travel and a simple capsule wardrobe to create her blog, Hej Doll. Jessica's sleek, utilitarian outfits lend themselves to great inspiration for those who are always traveling or on-the-go. Our favorite posts on the blog are Jessica’s city guides, each one showcasing her jetsetter looks.

Jessica tells VETTA that she keeps a lean closet to maintain a simpler life. “I save time, money, and energy by limiting my clothing to only those items that I love, feel great in, and know work well together.” Jessica is also a professional photographer, making Hej Doll is an endless archive of beautiful style and travel imagery.

Whether you are a seasoned member of a hunt or new to the sport and interested in beginning your own adventures in Fox Hunting, you can never know the basics well enough, and this is exactly what we shall be covering in Fox Hunting 101.

FOXHUNTING 101 -THE COAT
Our first installment of Fox Hunting 101 begins with you, the rider, and how you should be dressed when participating in a hunt. Proper attire for hunting stems from a historic practicality that is necessary for safety and preparedness in the field. A black hunt or frock coat with 3 black buttons on the front should be worn by members who have not been awarded colors. These coats are preferably made from Melton material, which is close to waterproof and comes in a variety of weights, and are ideal for protecting the rider from the cold and wet weather that often confronts hunts during the winter season. During informal or ‘ratcatcher’ hunts in the off season and informal meets during the regular season, cubbing coats may be worn.

FOXHUNTING 101 – THE VEST
Under your coat it is traditional to wear a vest (Canary or Tattersall in color) over a shirt that is typically white, yellow, or a subtle variation of those colors. It is traditional to wear a white hunting stock or stock tie secured by plain gold stock pin, this stock tie can be used in emergencies as a bandage for you or your horse, stirrup leather, rein, splint etc. The loose ends should be secured to your shirt with safety pins or another method to keep it from looking unruly.

FOXHUNTING 101 – THE BREECHES
Breeches are another Fox Hunting 101 must. Breeches are traditionally tan but canary, different shades of brown such as buff, and rust are also acceptable. White breeches should only be worn with frock coats. Bear in mind that you will be riding in cold weather and make sure your breeches will be up to the job of keeping you warm, it is not uncommon for riders to wear thermal underwear underneath their breeches. Plain, black leather tall boots are the most appropriate for field members and guests.

The most traditional helmets are black velvet safety helmets with the ribbon stitched up. It is a good idea to check the safety standards of the hunt you will be fox hunting riding with but most require an ASTM approved helmet.

Riders in the field are allowed to carry a brown leather hunt whip (or Hunt Crop) but must not use it unless instructed to do so by their field master.

A GOOD FOXHUNTING 101 TIP TO REMEMBER:
When hunting with an unfamiliar or new hunt, it is always a good idea to contact the Hunt Master or Hunt Secretary to find out what their preferences are when it comes to rider appearance, as it tends to differ slightly from hunt to hunt. For example, some prefer certain colors of breeches or vests, it never hurts to ask!

That concludes our first installment of the Fox Hunting 101 blog series, we hope this helps! You can get fitted out for hunt season by going to this page for Men’s Fox Hunting Apparel and this page for Women’s Fox Hunting Apparel

A financial market refers to a marketplace where various kinds of financial securities such as stocks, bonds, commodities, etc. are traded. The term ‘market’ can also refer to exchanges that are legal organizations that facilitate the trade of financial securities between buyers and sellers. In any case, these markets are categorized based of the type of financial securities that are traded through them. One such financial market is the Derivatives Market.

Derivatives market thus refers to the financial marketplace where derivative instruments such as futures, forwards and options contracts are traded between counterparties.

It was during the 1980s and 1990s that the financial markets saw a major growth in the trade of derivatives. A derivative is a financial instrument whose value is derived from the value of an underlying asset such as stocks, bonds, currencies, commodities, interest rates and/or different market indices. These underlying assets have fluctuating prices and returns, and derivatives provides a means to investors to reduce the risk exposure and leverage profits on these assets. Thus, derivatives are an essential class of financial instruments and central to the modern financial markets providing not just economic benefits but also resilience against risks. The most common derivatives include futures, forwards, options and swap contracts.

As per the European Securities and Markets Authority (ESMA), derivatives market has grown impressively (around 24 percent per year in the last decade) into a truly global market with over €680 trillion of notional amount outstanding. The interest rate derivatives (IRDs) accounted for 82% of the total notional amount outstanding followed by currency derivatives at 11%.

Main types of derivative contracts
Derivatives derive their value from an underlying asset, or simply an ‘underlying’. There is a wide range of financial instruments that can be an underlying for a derivative such as equities or equity index, fixed-income instruments, foreign currencies, commodities, and even other securities. And thus, depending on the underlying, derivative contracts can derive their values from corresponding equity prices, interest rates, foreign exchange rates, prices of commodities and probable credit events. The most common types of derivative contracts are elucidated below:

Forwards and Futures
Forward and futures contracts share a similar feature: they are an agreement between two parties to buy or sell a specified quantity of an underlying asset at a specified price (or ‘exercise price’) on a predetermined date in the future (or ‘expiration date’). While forwards are customized contracts i.e., they can be tailor-made according to the asset being traded, expiry date and price, and traded Over-the-Counter (OTC), futures are standardized contracts traded on centralized exchanges. The party that buys the underlying is said to be taking a long position while the party that sells the asset takes a short position and both parties are obligated to fulfil their part of the contract.

Options
An option contract is a financial derivative that gives its holder the right (but not the obligation) to trade an underlying asset at a price set in advance irrespective of the market price at maturity. When an option is bought, its holder pays a fixed amount to the option writer as cost for this flexibility of trading that the option provides, known as the premium. Options can be of the types: call (right to buy) or put (right to sell).

Swaps
Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments charged can be based on fixed or floating interest rates, depending on contract terms decided by the counterparties. The calculation of these payments is based on an agreed-upon amount, called the notional principal amount (or just notional).

Exchange-traded vs Over-the-counter Derivatives Market
Exchange-traded derivatives markets
Exchange-traded derivatives markets are standardized markets for derivatives trading and follows rules set by the exchange. For instance, the exchange sets the expiry date of the derivatives, the lot-size, underlying securities on which derivatives can be created, settlement process etc. The exchange also performs the clearing and settlement of trades and provide credit guarantee by acting as a counterparty for every trade of derivatives. Thus, exchanges provide a transparent and systematic course of action for any derivatives trade.

Over-the-counter markets
Over-the-counter (also known as “OTC”) derivatives markets on the other hand, provide a lesser degree of regulations. They were almost entirely unregulated before the financial crisis Produits dérivés of 2007-2008 (also a time when derivatives markets were criticized, and the blame was placed on Credit Default Swaps). OTCs are customized markets and run by dealers who hedge risks by indulging in derivatives trading.

Types of market participants
The participants in the derivative markets can be categorized into different groups namely,

Hedgers
Hedging is a risk-neutralizing strategy when an investor seeks to protect a current or anticipated position in the market by limiting their risk exposure. They can do so by taking up an offset or counter position through derivative contracts. Parties such as individuals or companies who perform hedging are called Hedgers. The hedger thus aims to eliminate volatility against fluctuating prices of underlying securities and protect herself/himself from any downsides.

Speculators
Speculation is a very common technique used by traders and investors in the derivatives market. It is based on when traders have a strong viewpoint regarding the market behavior of any underlying security and though it is risky, if the viewpoint is correct, the speculation may reward with attractive payoffs. Thus, speculators use derivative contracts with a view to make profit from the subsequent price movements. They do not have any risk to hedge, in fact, they operate at a relatively high-risk level in anticipation of profits and provide liquidity in the market.

Arbitrageurs
Arbitrage is a strategy in which the participant (or arbitrageur) aims to make profits from the price differences which arise in the investments made in the financial markets as a result of mispricing. Arbitrageurs aim to earn low risk profits by taking two different positions in the same or different contracts (across different time periods) or on different exchanges to in-cash on price discrepancies or market inefficiencies.

Margin Traders
Margin is essentially the collateral amount deposited by an investor investing in a financial instrument to the counterparty in order to cover for the credit risk associated with the investment. In margin trading, the trader or investor is not required to pay the total value of your position upfront. Instead, they only need pay the margin amount which may vary and are usually fixed by the stock exchanges considering factors like volatility. Thus, margin traders buy and sell securities over a single session and square off their position on the same day, making a quick payoff if their speculations are right.

Criticism of derivatives
While derivatives provide numerous benefits and have significantly impacted modern finance and markets, they pose many risks too. In a 2002 letter to Berkshire Hathaway shareholders, Warren Buffet even described derivatives as “financial weapons of mass destruction”.

Derivatives are more highly leveraged due to relatively relaxed regulations surrounding them, and where one may need to put up half the money or more with buying other securities, derivatives traders can get by with just putting up a few percentage points of the total value of a derivatives contract as a margin. If the price of the underlying asset keeps falling, covering the margin account can lead to enormous losses. Derivatives are thus often criticized as they may allow investors to obtain unsustainable positions that elevates systematic risk so much that it can be equated to legalized gambling. Derivatives are also exposed to counterparty credit risk wherein there is scope of default on the contract by any of the parties involved in the contract. The risk becomes even greater while trading on OTC markets which are less regulated.

Derivatives have been associated with a number of high-profile credit events over the past two decades. For instance, in the early 1990s, Procter and Gamble Corporation lost more than $100 million in transactions in equity swaps. In 1995, Barings collapsed when one of its traders lost $1.4 billion (more than twice its then capital) in trading equity index derivatives.

The amounts involved with derivatives-related corporate financial distresses in the 2000s increased even more. Two such events were the bankruptcy of Enron Corporation in 2001 and the near collapse of AIG in 2008. The point of commonality among these events was the role of OTC derivative trades. Being an AAA-rated company, AIG was being exempted from posting collateral on most of its derivatives trading in 2008. In addition, AIG was unique among CDS market participants and acted almost exclusively as credit protection seller. When the global financial crisis reached its peak in late 2008, AIG’s CDS portfolios recorded substantial mark-to-market losses. Consequently, the company was asked to post $40 billion worth of collateral and the US government had to introduce a $150 billion financial package to prevent AIG, once the world’s largest insurer by market value, from filing for bankruptcy.

Conclusion
Derivatives were essentially created in response to some fundamental changes in the global financial system. If correctly handled, they help improve the resilience of the system, hedge market risks and bring economic benefits to the users. Thus, they are expected to grow further with financial globalization. However, past credit events have exposed many weaknesses in the organization of their trading. The aim is to minimize the risks associated with such trades while enjoying the benefits they bring to the financial system. An important challenge is to design new rules and regulations to mitigate the risks and to promote transparency by improving the quality and quantity of statistics on derivatives markets.

A financial market refers to a marketplace where various kinds of financial securities such as stocks, bonds, commodities, etc. are traded. The term ‘market’ can also refer to exchanges that are legal organizations that facilitate the trade of financial securities between buyers and sellers. In any case, these markets are categorized based of the type of financial securities that are traded through them. One such financial market is the Derivatives Market.

Derivatives market thus refers to the financial marketplace where derivative instruments such as futures, forwards and options contracts are traded between counterparties.

It was during the 1980s and 1990s that the financial markets saw a major growth in the trade of derivatives. A derivative is a financial instrument whose value is derived from the value of an underlying asset such as stocks, bonds, currencies, commodities, interest rates and/or different market indices. These underlying assets have fluctuating prices and returns, and derivatives provides a means to investors to reduce the risk exposure and leverage profits on these assets. Thus, derivatives are an essential class of financial instruments and central to the modern financial markets providing not just economic benefits but also resilience against risks. The most common derivatives include futures, forwards, options and swap contracts.

As per the European Securities and Markets Authority (ESMA), derivatives market has grown impressively (around 24 percent per year in the last decade) into a truly global market with over €680 trillion of notional amount outstanding. The interest rate derivatives (IRDs) accounted for 82% of the total notional amount outstanding followed by currency derivatives at 11%.

Main types of derivative contracts
Derivatives derive their value from an underlying asset, or simply an ‘underlying’. There is a wide range of financial instruments that can be an underlying for a derivative such as equities or equity index, fixed-income instruments, foreign currencies, commodities, and even other securities. And thus, depending on the underlying, derivative contracts can derive their values from corresponding equity prices, interest rates, foreign exchange rates, prices of commodities and probable credit events. The most common types of derivative contracts are elucidated below:

Forwards and Futures
Forward and futures contracts share a similar feature: they are an agreement between two parties to buy or sell a specified quantity of an underlying asset at a specified price (or ‘exercise price’) on a predetermined date in the future (or ‘expiration date’). While forwards are customized contracts i.e., they can be tailor-made according to the asset being traded, expiry date and price, and traded Over-the-Counter (OTC), futures are standardized contracts traded on centralized exchanges. The party that buys the underlying is said to be taking a long position while the party that sells the asset takes a short position and both parties are obligated to fulfil their part of the contract.

Options
An option contract is a financial derivative that gives its holder the right (but not the obligation) to trade an underlying asset at a price set in advance irrespective of the market price at maturity. When an option is bought, its holder pays a fixed amount to the option writer as cost for this flexibility of trading that the option provides, known as the premium. Options can be of the types: call (right to buy) or put (right to sell).

Swaps
Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments charged can be based on fixed or floating interest rates, depending on contract terms decided by the counterparties. The calculation of these payments is based on an agreed-upon amount, called the notional principal amount (or just notional).

Exchange-traded vs Over-the-counter Derivatives Market
Exchange-traded derivatives markets
Exchange-traded derivatives markets are standardized markets for derivatives trading and follows rules set by the exchange. For instance, the exchange sets the expiry date of the derivatives, the lot-size, underlying securities on which derivatives can be created, settlement process etc. The exchange also performs the clearing and settlement of trades and provide credit guarantee by acting as a counterparty for every trade of derivatives. Thus, exchanges provide a transparent and systematic course of action for any derivatives trade.

Over-the-counter markets
Over-the-counter (also known as “OTC”) derivatives markets on the other hand, provide a lesser degree of regulations. They were almost entirely unregulated before the financial crisis of 2007-2008 (also a time when derivatives markets were criticized, and the blame was placed on Credit Default Swaps). OTCs are customized markets and run by dealers who hedge risks by indulging in derivatives trading.

Types of market participants
The participants in the derivative markets can be categorized into different groups namely,

Hedgers
Hedging is a risk-neutralizing strategy when an investor seeks to protect a current or anticipated position in the market by limiting their risk exposure. They can do so by taking up an offset or counter position through derivative contracts. Parties such as individuals or companies who perform hedging are called Hedgers. The hedger thus aims to eliminate volatility against fluctuating prices of underlying securities and protect herself/himself from any downsides.

Speculators
Speculation is a very common technique used by traders and investors in the derivatives market. It is based on when traders have a strong viewpoint regarding the market behavior of any underlying security and though it is risky, if the viewpoint is correct, the speculation may reward with attractive payoffs. Thus, speculators use derivative contracts with a view to make profit from the subsequent price movements. They do not have any risk to hedge, in fact, they operate at a relatively high-risk level in anticipation of profits and provide liquidity in the market.

Arbitrageurs
Arbitrage is a strategy in which the participant (or arbitrageur) aims to make profits from the price differences which arise in the investments made in the financial markets as a result of mispricing. Arbitrageurs aim to earn low risk profits by taking two different positions in the same or different contracts (across different time periods) or on different exchanges to in-cash on price discrepancies or market inefficiencies.

Margin Traders
Margin is essentially the collateral amount deposited by an investor investing in a financial instrument to the counterparty in order to cover for the credit risk associated with the investment. In margin trading, the trader or investor is not required to pay the total value of your position upfront. Instead, they only need pay the margin amount which may vary and are usually fixed by the stock exchanges considering factors like volatility. Thus, margin traders buy and sell securities over a single session and square off their position on the same day, making a quick payoff if their speculations are right.

Criticism of derivatives
While derivatives provide numerous benefits and have significantly impacted modern finance and markets, they pose many risks too. In a 2002 letter to Berkshire Hathaway shareholders, Warren Buffet even described derivatives as “financial weapons of mass destruction”.

Derivatives are more highly leveraged due to relatively relaxed regulations surrounding them, and where one may need to put up half the money or more with buying other securities, derivatives traders can get by with just putting up a few percentage points of the total value of a derivatives contract as a margin. If the price of the underlying asset keeps falling, covering the margin account can lead to enormous losses. Derivatives are thus often criticized as they may allow investors to obtain unsustainable positions that elevates systematic risk so much that it can be equated to legalized gambling. Derivatives are also exposed to counterparty credit risk wherein there is scope of default on the contract by any of the parties involved in the contract. The risk becomes even greater while trading on OTC markets which are less regulated.

Derivatives have been associated with a number of high-profile credit events over the past two decades. For instance, in the early 1990s, Procter and Gamble Corporation lost more than $100 million in transactions in equity swaps. In 1995, Barings collapsed when one of its traders lost $1.4 billion (more than twice its then capital) in trading equity index derivatives.

The amounts involved with derivatives-related corporate financial distresses in the 2000s increased even more. Two such events were the bankruptcy of Enron Corporation in 2001 and the near collapse of AIG in 2008. The point of commonality among these events was the role of OTC derivative trades. Being an AAA-rated company, AIG was being exempted from posting collateral on most of its derivatives trading in 2008. In addition, AIG was unique among CDS market participants and acted almost exclusively as credit protection seller. When the global financial crisis reached its peak in late 2008, AIG’s CDS portfolios recorded substantial mark-to-market losses. Consequently, the company was asked to post $40 billion worth of collateral and the US government had to introduce a $150 billion financial package to prevent AIG, once the world’s largest insurer by market value, from filing for bankruptcy.

Conclusion
Derivatives were essentially created in response to some fundamental changes in the global financial system. If correctly handled, they help improve the resilience of the system, hedge market risks and bring economic benefits to the users. Thus, they are expected to grow further with financial globalization. However, past credit events have exposed many weaknesses in the organization of Produits dérivés their trading. The aim is to minimize the risks associated with such trades while enjoying the benefits they bring to the financial system. An important challenge is to design new rules and regulations to mitigate the risks and to promote transparency by improving the quality and quantity of statistics on derivatives markets.