What Are Derivatives?
Derivatives are financial instruments whose value is dependent on the value of another asset, known as the underlying asset. These can include stocks, bonds, currencies, interest rates, or even other derivatives.
Types of Derivatives
- Futures: Contracts to buy or sell an asset at a future date at an agreed-upon price.
- Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a set price before a certain date.
- Swaps: Contracts to exchange cash flows or other financial instruments between parties.
Derivatives can be used for hedging purposes, to speculate, or to gain exposure to underlying price movements without owning the underlying asset.
Benefits and Risks
While derivatives can be powerful tools, they come with risks including market risk, counterparty risk, and liquidity risk. It is important to understand these risks before engaging in derivative trading.
Learn More
For deeper insights into derivatives, visit our Financial Instruments Guide or check out our Intro to Derivatives Course!