A derivative is a financial product that enables traders to speculate on the price movement of assets without purchasing the assets themselves.
A derivative is an agreement between two or more parties whose value is driven by underlying financial security or asset. It aims to mitigate the risk faced by investors in the shape of variations in forex exchange rates, bonds, stocks, indexes, and commodities.
Because there is nothing physically being traded when derivative positions are opened, they usually exist as a contract between two parties.
Derivatives are financial instruments that acquire the majority of their value from the price of the underlying asset they are tracking such as commodities and currencies, or from securities such as stocks and bonds.
Swaps, futures, forwards, and options are the most common derivatives. Investors trade them on an exchange or over-the-counter (OTC) usually as an alternative to speculating in the underlying asset or to hedge their risk on a position in the underlying asset.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.