What are Derivatives?
In finance, a derivative is a contract that derives its value from the performance of an underlying entity such as an asset, index, or interest rate. These complex financial instruments are used for hedging risk and for speculative purposes.
Types of Derivatives
- Forwards and Futures
- Options
- Swaps
Considerations
Derivatives can provide utility through their capability to manage complex financial risks. However, they can also magnify losses, as famously observed during financial crises. Knowledge and caution are essential!
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