Derivatives used by specified Fidelity funds

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.

Forward contracts

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 March 31, 2018

Futures contracts

A futures contract is similar to a forward contract, but is traded on an exchange. As part of being traded on an exchange, the futures contract is centrally cleared by a clearing corporation that guarantees each party’s performance under the terms of the contract (thus minimizing counterparty risk).1  
Common types of futures are
  • financial futures that are based on such things as interest rates, currency rates and equity futures
  • commodity futures that are based on the price of physical assets such as gold, soybeans and crude oil

Funds using this derivative as at March 31, 2018

Options contracts

The buyer of an option contract is given the right, but not the obligation, to buy (a call) or sell (a put) an underlying asset at a specified price (the strike price) in the future. The options contract will specify the quantity of the asset to be purchased, outline the settlement terms and specify an expiration date. The underlying asset for an option can be a variety of instruments, including a stock, a future or a swap contract.
The type of option indicates when the option holder can exercise its option prior to or at the expiration date:
  • American style: can be exercised any time up until the expiration date
  • European style: can be exercised only at the expiration date
The seller of an option contract (commonly referred to as the party writing an option) has the obligation to buy (a written put) or sell (a written call) an asset at a specified price in the future.
Options can be exchange-traded where they are centrally cleared by a clearing corporation or transacted over-the-counter (OTC) directly between the buyer and seller.

Funds using this derivative as at March 31, 2018

Swap agreements

Swap agreements are an exchange of cash flows between the buyer and seller and are based on an underlying interest. Common types of swap agreements include the following:
  • Credit default swaps, which require the buyer of the swap to pay a regular premium to the seller in exchange for credit protection on a reference issuer. In the event of default of the reference issuer (or other credit event defined in the swap terms), the seller would pay the buyer the amount of protection purchased (called the notional amount).
  • Total return swaps, which require either the buyer or seller to pay the other party depending on whether a specified return level has been reached. Total return swaps can be written on a single stock or on a stock index. The amount of payment is dependent on the size of the swap (called the notional amount) and the difference between the actual and threshold return level.
    Interest rate swaps, which require both parties of the swap to exchange regular interest payments based on their specified interest rate. The specified interest rate can be either a fixed or floating rate.

Funds using this derivative as at March 31, 2018

1 Moody's Analytics Global Education (Canada), Inc. (2015) – Derivatives Fundamentals Course.

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