what are derivatives

A derivative is a financial contract between two or more parties that derives its value from an underlying asset, group of assets, or benchmark. The underlying asset can be an asset, index, or interest rate, and is often simply called the underlying). 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) ). The value of a derivative is dependent on the performance of the underlying asset, and prices for derivatives derive from fluctuations in the underlying asset. Derivatives can be traded on an exchange or over-the-counter, and they are usually leveraged instruments, which increases their potential risks and rewards. Common types of derivatives include futures contracts, forwards, options, and swaps. Derivatives are used for two main purposes: to speculate and to hedge investments.