Derivative

 What is Derivative ?

A derivative is a financial instrument whose value is derived from the value of an underlying asset. Derivatives are used as a way to hedge risk, speculate on price movements, and manage the financial exposures of businesses.

There are various types of derivatives, including futures, options, swaps, and forwards. These instruments are typically traded on exchanges or over-the-counter (OTC) markets.

Futures are standardized contracts that obligate the buyer to purchase a specific asset at a predetermined price on a specific date in the future. Options are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specific date. Swaps are agreements between two parties to exchange a series of cash flows in the future based on the performance of an underlying asset. Forwards are customized contracts that obligate the buyer to purchase an asset at a predetermined price on a specific date in the future.

Derivatives can be used for a variety of purposes, including reducing the impact of price fluctuations on a business's financial performance, speculating on the direction of market prices, and transferring risk from one party to another. However, derivatives can also be complex and risky, and can be misused or misunderstood, leading to significant losses for investors and businesses. As a result, the use of derivatives is regulated by governments and financial authorities around the world.

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