The English used in this article or section may not be easy for everybody to understand. (March 2019)
In finance, a derivative is a special type of contract. In it, the two parties agree to sell (or to buy) certain goods, at a given price, on a given date. Derivatives can be used in two ways. The first is called speculation: One party hopes that the market price differs from the price agreed upon in the contract, so that they can make the difference between the two. The second is called hedging: One party wants to make sure that the market price doesn't go in a direction that would hurt their profits, so they make sure that the price is agreed upon a long time before the transaction takes place. For a seller, hedging means that they can be certain to receive the agreed upon price, and for the buyer, hedging means that they can be certain not to pay more than the agreed upon price. From a moral point of view, speculation is considered a negative activity.
Derivatives can take many forms, but some of the most common types are Futures, Contracts for Difference and Options. They can also be structured on a range of different assets including Forex, Equities, Commodities, and interest rates.
References[change | change source]
- Kaori Suzuki and David Turner (December 10, 2005). "Sensitive politics over Japan's staple crop delays rice futures plan". The Financial Times. Retrieved October 23, 2010.
- Walters, Steve (7 Feb 2018). "Contracts For Difference". Coin Bureau. Retrieved 26 Jun 2018.