A derivative does not stand alone; its price is derived from something else, such as a share, a currency pair, an interest rate, or a commodity. Futures, options, and swaps are common types. Companies use them to hedge risk; traders use them to speculate with less capital than buying the underlying outright, which also means losses can mount quickly.
Key takeaways
- Derivatives can hedge risk or amplify it, depending on how they are used.
- Leverage is common, so small market moves can produce large gains or losses.
- Counterparty risk matters on over-the-counter contracts.
- Beginners should master cash markets before touching complex derivatives.