What are Derivatives?
Derivatives are financial contracts whose value derives from the performance of an underlying asset, index, rate, or another financial instrument. They are used for various purposes, including hedging against risk, speculating on price movements, and facilitating arbitrage opportunities. Derivatives are versatile financial instruments that serve various purposes in the global financial system. They enable risk management, price discovery, and speculation, but they also require careful consideration of associated risks and complexities.
Geeky Takeaways:
- Derivatives play a vital role in risk management for investors and businesses. By using derivatives, market participants can hedge against adverse price movements in underlying assets, thereby reducing exposure to financial risk.
- Derivatives markets contribute to price discovery and liquidity in financial markets.
- Derivatives offer opportunities for speculation, allowing investors to profit from price movements in underlying assets without owning the assets themselves.
Table of Content
- Types of Derivatives
- 1. Options
- 2. Futures
- 3. Forwards
- 4. Swaps
- Conclusion