What is the definition of Derivatives?

Derivatives are financial tools or instruments that get their value from a financial asset such as a good stock, foreign currencies or publicly traded securities. Instead of exchanging or trading the financial asset, the traders agree with each other to exchange cash based on that asset or for an agreement to buy or sell the asset as some future date that they specify.

Some examples of derivatives are:

• Exchange-traded derivatives are traded through an exchange.
• Over-the-counter derivatives, which are privately traded without using an intermediary or an exchange. These include swaps and forward contracts.

These cover weather derivatives, commodity derivatives, credit derivatives, interest rate derivatives, foreign exchange derivatives and equity derivatives. Derivatives are usually used to speculate and to hedge risk.

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