Warren Buffett has said that derivatives are the toxic waste of the financial community. Are they really? All derivatives? What about options? Does any of this matter to a property investor?
Let's take a step back and define a derivative. One definition, maybe a layman's definition, is the value of the asset is derived from or based on some other asset. The value of an option contract to buy a property is tied to the value of the property. As an example, assume you have a contract to buy a property 'subject to' obtaining planning permission. The contract is an option or conditional contract. The value of the option would be the difference between the value of the property with planning permission (the OMV) and the price your contract specifies. The value of the contract, the option, the derivative, is a function of
the underlying asset (the property with planning permission).
Hopefully that is clear enough for this discussion. If not, bare with me or get in touch.