A financial derivative is a financial instrument whose value is derived from the value of an underlying asset. It is a contract between two or more parties that specifies conditions under which payments are to be made between the parties.
Financial derivatives are financial instruments whose value is derived from the value of an underlying asset. They are used to hedge against risk, speculate on the future direction of an asset, or to generate income. Derivatives can be used to manage risk in a portfolio, as well as to increase returns.
Derivatives are divided into two main categories: exchange-traded derivatives and over-the-counter (OTC) derivatives. Exchange-traded derivatives are traded on exchanges, such as the Chicago Mercantile Exchange (CME) and the New York Stock Exchange (NYSE). These derivatives are standardized contracts that are traded on a regulated exchange. OTC derivatives are contracts that are negotiated directly between two parties, and are not traded on an exchange.
Derivatives can be divided into four main types: futures, options, swaps, and forwards. Futures are contracts that obligate the buyer to purchase an asset at a predetermined price on a specified date in the future. Options are contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on a specified date in the future. Swaps are agreements between two parties to exchange cash flows based on the performance of an underlying asset. Forwards are contracts that obligate the buyer to purchase an asset at a predetermined price on a specified date in the future.
Derivatives can be used to hedge against risk, speculate on the future direction of an asset, or to generate income. They can also be used to manage risk in a portfolio, as well as to increase returns. Derivatives can be divided into four main types: futures, options, swaps, and forwards. Exchange-traded derivatives are traded on exchanges, while OTC derivatives are negotiated directly between two parties.