Short definition: Derivatives are financial contracts whose value is derived from an underlying asset or benchmark.
Explanation: These contracts provide investors with exposure to the underlying asset without actually owning it. Derivatives are used for various purposes, including hedging (managing risk) and speculation (taking on risk to potentially profit from price movements). Common types of derivatives include futures contracts, options contracts, and swaps.
Example: An airline company might use fuel futures contracts to hedge against potential increases in fuel prices, thus protecting its profitability.
Additional information (optional): Derivatives can be complex financial instruments, and their value can be highly sensitive to changes in the underlying asset’s price or other market factors. Understanding the risks and complexities of derivatives is essential before investing in them.