Derivative

A derivative is a financial instrument whose value is derived from the price of an underlying asset or group of assets, such as stocks, bonds, commodities, currencies, or interest rates. Derivatives are commonly used for hedging risks, speculating on price movements, or enhancing liquidity in financial markets.

The most common types of derivatives include futures, options, swaps, and forward contracts. These instruments allow traders and investors to gain exposure to price changes in the underlying asset without directly owning it. By using derivatives, participants can benefit from leverage, as these instruments typically require only a fraction of the underlying asset's value to open a position.

Derivatives are frequently utilized to manage risk. For example, a company might use currency or interest rate derivatives to protect against fluctuations in exchange rates or borrowing costs. Conversely, speculators may use derivatives to profit from anticipated changes in market conditions.

While derivatives offer numerous opportunities for profit, they also carry a significant level of risk, especially when leverage is involved, as small price movements in the underlying asset can lead to substantial gains or losses.