What does derivatives mean?

A derivative is defined to be some sort of contract that will be checked by both parties that are involved in the deal. This will discuss the price of the underlying asset. Some of the common assets are commodities, market indexes, interest rates, stocks, and so much more. There are different types of derivatives that are available namely Forwards, Futures, Swaps, and Options.

Take note that the different contracts have differences that cannot be imitated elsewhere. This is done to make sure that the right asset will be protected. Take note that out of the four types, the Swaps are not traded in the stock market because they are more complex than the other three.

Derivatives are a bit complex to explain and also to understand. It’s important first to realize a derivative has no value all by itself. Rather, it’s a legal contract that outlines an agreement to purchase assets on a specific date at a specific price. The assets serve as the underlying value for the derivative.

Commonly used assets include commodities such as gasoline or oil, currencies such as US dollars or foreign monies, stocks or bonds, or interest rate futures such as Treasury-bill futures or Treasury-bond futures. Since interest rates can rise and fall, they are often used as derivatives to hedge against or help to manage risk.