Mar 25 2011

What is a financial derivative?

Category: Finance


Derivatives FinanceA derivative is a type of financial instrument that’s value is determined by an underlying financial asset or index. Futures, options, and swaps are types of financial derivatives that are used for a number of purposes including managing risk (hedging) and speculation. The derivative itself is essentially a contract between two parties that lets one of those parties “control” the underlying asset for a specific time and for a specific price. Leverage is the key to making all of this possible. It gives investors the ability to control large amounts of capital with only a small principal outlay.

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