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Derivatives
A derivative is a financial contract whose value is derived from an underlying asset, such as a stock, bond, commodity, or currency. The underlying asset can be tangible or intangible and the value of the derivative is derived from the price changes of the underlying asset.
Derivatives are used to manage risk and to speculate on future price movements of the underlying asset.
Two examples of derivatives are:
- Options: An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a specific date. For example, a stock option allows the holder to buy or sell a specific number of shares of a stock at a specific price on or before a specific date.
- Futures: A future is a contract that requires the holder to buy or sell an underlying asset at a specific price on a specific date in the future. For example, a commodity future allows the holder to buy or sell a specific amount of a commodity, such as gold or oil, at a specific price on a specific date in the future.
It's important to note that derivatives can be complex and carry a high level of risk, and these examples are just a few of the many types of derivatives that exist. Some derivatives transactions can be highly leveraged, meaning that a small movement in the underlying asset could result in a large gain or loss on the derivative contract.