Derivatives are commonly used by Canadian mutual funds, and the prudent use of them can provide diversification benefits and potentially reduce risk within a mutual fund. A derivative is a contract whose value is “derived” from the price of something else, generally a stock, bond, currency, commodity, interest rate or market index. The four types of derivative instruments Fidelity Funds primarily use are called forward contracts, futures contracts, options contracts and swap agreements.
Derivatives can be very useful and effective when used properly. The use of derivatives by Canadian mutual funds is strictly regulated, and Fidelity has adopted policies and procedures to seek to ensure that the use of derivatives in Fidelity’s mutual funds complies with applicable regulatory requirements and addresses the risks associated with derivative instruments.
For more information on these derivatives, please click on the headings below. Also, you can find more information about the use of derivatives and the risks of investing in them in the simplified prospectus and annual information form for the Fidelity Funds.
A forward contract is one that obligates one party to buy and another to sell a defined amount of an underlying interest at an agreed-upon price at a specific time in the future unless the parties decide to cancel the obligation.1
Forward contracts are over-the-counter instruments, meaning they do not trade on an exchange and the performance of the parties involved is not guaranteed by a clearing corporation (giving rise to counterparty risk).
The most common type of forward contracts are currency forward contracts, which are an exchange of a specified amount of currencies in differing denominations. These instruments are frequently used to hedge or reduce the foreign exchange risk of securities not denominated in Canadian dollars.
Funds using this derivative as at June 30, 2023