The term “derivative” refers to a type of financial contract whose value depends on an underlying asset, asset group or benchmark. A derivative is concluded between two or more parties and can be traded on an exchange or over-the-counter.
Basic concepts on derivatives
- Derivatives are financial contracts between two or more parties that derive their value from an underlying asset, asset group or benchmark;
- A derivative may be traded on an exchange or over-the-counter market;
- Prices of derivatives depend on fluctuations in the underlying asset;
- Derivatives are usually leveraged instruments, which increases their potential risks and returns;
- Common derivatives include futures contracts, forwards, options, and swaps.