|
|
|
|
Derivatives
Financial derivatives are investment instruments that derive their value based on another underlying asset. The derivative is not the asset in itself. The derivative is usually an agreement or a contract to trade the asset at a certain price in a future date. These instruments often provide a high degree of leverage as the purchase price of the derivative is at a fraction, known as a premium, of the underlying asset. Common types of derivatives are futures contracts, options, forward contracts and swaps with futures and options being the most common. There are derivative markets for stocks, stock market indices, commodities, currencies, bonds and debt instruments. Derivatives can be used as insurance or hedges to protect current investment positions. The smaller outlay of capital to purchase a derivative allows an investor to hold a derivative that increases in value as the position in the underlying asset decreases in value. The leverage in the derivative allows you to retain your original position without the risk of major losses should its value decrease unexpectedly. Derivatives can also be traded for profit by speculating on the market. Again with the leverage in a derivative there exists a much higher opportunity for profit than with trading the underlying asset itself. Though this can be accompanied by higher risks.
|
