Finance derivatives are a contract that derives its value from an underlying asset or factor. In short, the value of a derivative depends on the value of something else. When the value of the underlying factor changes, the value of the derivative instrument changes. Derivatives are often used for speculation or for hedging risk.
Common derivatives instruments include futures, forwards, options, and swaps. In addition, common underlying assets or factors include stocks, bonds, currency exchange rates, commodities, market indices, and interest rates. However, derivatives can derive their value from almost anything, including weather data and political election outcomes.
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