Insights
What are Derivatives?
Derivatives are financial instruments used to manage one's exposure to today's volatile markets. A derivative product's value depends upon and is derived from an underlying instrument, such as commodities, interest rates, indices or stocks.
In other words, a derivative is a financial contract with a value linked to the expected future price movements of an underlying asset it is linked. It is used as a tool for hedging, speculating and arbitraging.
Futures and options are essentially elementary derivative products mostly traded on exchanges. A futures contract is an agreement between two parties to buy or sell the underlying instrument at a specific time in the future at a specific price determined today.
An option however, provides the holder/buyer the right, but not the obligation, to purchase or sell a certain quantity of the underlying instrument at a stipulated price within a specific time period by paying a premium.