Derivatives
Derivatives are financial contracts whose value is determined by an underlying asset, group of assets or benchmark. A derivative is a contract formed by two or more parties that can be exchanged on an exchange or over-the-counter (OTC). These contracts can be used to trade a variety of assets and come with their own set of hazards. Movements in the underlying asset determine derivative prices. These financial products are widely used to get access to specific markets and may be traded to mitigate risk. Derivatives can be used to either mitigate risk (hedging) or to assume risk in exchange for a corresponding return (speculation). Derivatives can shift risk (and the associated profits) from risk-averse to risk-seeking investors. Derivatives can be used to hedge a position, speculate on the direction of an underlying asset, or give holdings leverage. Originally, derivatives were employed to ensure that exchange rates for globally traded goods were balanced. International traders required a system to account for national currencies' different value.
