DERIVATIVES

Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. Derivatives are used for a variety of purposes, including managing risk, speculating on market movements, and hedging against changes in the price of an underlying asset.

Common types of derivatives include options, futures and swaps-

Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Futures are agreements to buy or sell an underlying asset at a specific price on a specific date in the future.

Swaps are agreements between two parties to exchange cash flows based on the performance of an underlying asset.

Derivatives can be used to manage risk in various ways, such as by hedging against changes in the price of an underlying asset. However, they can also increase risk if they are used inappropriately or are not well understood. As a result, derivatives are regulated by government agencies and oversight bodies in many countries.