• Credit analysis should play an increasing role in equity investment

• Investors should appreciate that in the majority of cases derivatives are contracts and not assets

• Shares enjoy a certain element of standardisation, but by their very nature derivatives - particularly OTC - are very flexible; thus the importance of carefully analysing separately each derivative investment

convertible bonds & warrants

• Unlike exchange traded futures/options and OTC options, corporate issued convertible bonds and warrants are assets and not contracts.

• Convertible bonds carry the same credit risk as that of straight bonds: if the company goes bust, the bonds may not be redeemed.

• Warrants are similar to shares, where credit risk is not really an issue.

exchange-traded futures and options

• futures brokers deal with clients as principals and not as agents, thus the investor takes the credit risk directly of the broker and not the exchange itself

• the futures exchange safeguards are to protect itself and its member brokers, not directly clients; a client compensation fund may exist, but this will usually be far smaller than any reserve fund used to bail out member brokers

otc options

• the investor takes the credit risk purely of the direct issuer of the contract

• contract terms should be scrutinised as these will not usually be standardised

• careful distinction should be made between exchange traded options and OTC options listed on exchanges