Derivative

In finance, a derivative is a financial instrument whose value is derived from the value of an underlying asset, such as a stock, bond, currency, or commodity. The value of a derivative depends on the price movements of the underlying asset, and its value can rise or fall independently of the underlying asset.

Some common types of derivatives include:

• Futures contracts: These are contracts that require the buyer to purchase a specified amount of an underlying asset at a future date and at a predetermined price.

• Options contracts: These are contracts that give the holder the right, but not the obligation, to buy or sell a specified amount of an underlying asset at a future date and at a predetermined price.

• Swaps: These are agreements between two parties to exchange cash flows based on a specified set of conditions.

• Forwards contracts: These are contracts similar to futures contracts, but they are customised and traded over-the-counter (OTC) rather than on an exchange.

Derivatives are used by a wide range of market participants, including investors, speculators, and financial institutions. They can be used to manage risk, such as by hedging against potential losses, or to generate profits through speculation or arbitrage. However, derivatives can also be complex and risky financial instruments, and their use can lead to significant financial losses.