What are derivatives?

Derivatives are financial contracts whose value is derived from the performance of an underlying asset, index, or interest rate. Common underlying assets include stocks, bonds, commodities, currencies, or market indices. The main types of derivatives are futures, options, forwards, and swaps. Investors use derivatives for hedging risks, speculating on price movements, or gaining access to assets or markets without directly owning them. For example, a farmer may use derivatives to lock in future crop prices, protecting against market volatility. While derivatives can provide powerful risk management tools and opportunities for profit, they can also be highly complex and risky, particularly when used for speculation without proper knowledge and strategies.