Derivatives help you to manage your risk efficiently
In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the “underlying”. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded in the stock exchanges. Derivatives are one of the three main categories of financial instruments, the other two being equity (i.e., stocks or shares) and debt (i.e., bonds and mortgages).
Derivative products are the go to for Investors.
Key features of Derivatives
- Derivatives are leveraged investment avenues, which is what makes it a highly rewarding endeavour.
- Derivatives are complex investment avenues that can be used as insurance against uncertainties. It can also be used for hedging strategies to maximize the yields of their investments and diversification.
- Derivatives come with varying levels of risk, it can be suitable for the risk-taking investor
- Derivatives help in increasing market efficiency and also transfer risk from one party to another.
- Derivatives help in capital protection and risk management using products like futures, forwards, options and swaps.