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Derivatives

 

A derivative is a financial instrument, or more simply an agreement between two parties, that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to.

There are many kinds of derivatives, with the most notable being swaps, futures, and options. Derivatives are mainly used by investors to speculate, provide leverage, obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives) and  hedge or mitigate risk in the underlying.