Financial derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or rate. Common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes. Derivatives are typically used for hedging risk or for speculative purposes.
Types of Financial Derivatives
There are several types of financial derivatives, including:
Futures Contracts: Agreements to buy or sell an asset at a future date at a predetermined price. Options: Contracts that give the holder the right, but not the obligation, to buy or sell an asset at a specific price before a certain date. Swaps: Agreements to exchange cash flows or other financial instruments between parties. Forward Contracts: Customized contracts between two parties to buy or sell an asset at a specified future date at a price agreed upon today.