What are derivatives in finance?

Derivatives are financial instruments whose value is derived from an underlying asset such as stocks, bonds, commodities, currencies, interest rates, or market indexes. Common types of derivatives include futures, options, forwards, and swaps. These contracts are used for hedging risk, speculation, and leveraging investments. For example, a futures contract allows a buyer to purchase an asset at a predetermined price at a future date, helping manage price risk. While derivatives can offer protection against volatility, they also carry high risk due to their complexity and potential for significant losses. They are traded on exchanges or over-the-counter, depending on the type and regulatory environment.