Options & Derivatives
Derivatives
Derivatives let investors gain exposure to an asset without necessarily owning it. Options, futures, and swaps are the most common types, each deriving its value from something else that trades in the market.
They serve two broad purposes: hedging and speculation. A farmer can lock in a crop price with futures, while a trader can amplify a bet with options. The leverage that makes them powerful also makes them risky.
Because derivatives markets are often larger and faster-moving than the underlying markets, they can signal shifts in sentiment and, at times, amplify volatility across the financial system.
Example
A futures contract that locks in the price of oil for delivery next year is a common type of derivative.
Related terms
Derivatives — FAQ
What is Derivatives?
Derivatives are financial contracts whose value is derived from an underlying asset such as a stock, bond, commodity, currency, or index.
Can you give an example of Derivatives?
A futures contract that locks in the price of oil for delivery next year is a common type of derivative.
Understanding creates conviction.
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