What are the key differences between derivatives and other financial instruments?

What are the key differences between derivatives and other financial instruments?

Derivatives are financial contracts whose value is derived from an underlying asset, while other instruments like stocks and bonds represent ownership or debt. Would you like to know more about specific types of derivatives?

Yes, can you explain options and futures?

Sure! Options give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price. Futures, on the other hand, are contracts to buy or sell an asset at a future date for a price agreed upon today. They are mandatory, unlike options.

How do these derivatives affect risk management?

Derivatives can be used to hedge against risks. For example, a company can use futures to lock in prices for raw materials, reducing uncertainty in costs. Options can provide insurance against price fluctuations.

Are there any risks associated with trading derivatives?

Yes, trading derivatives can be risky due to leverage, which can amplify losses. Additionally, the complexity of these instruments can lead to misunderstandings and poor decision-making.