What are derivatives? What is the use of derivatives?

Derivative is a contract or a product whose value is derived from value of some other asset known as underlying. Derivatives are based on wide range of underlying assets. These include: • Metals such as Gold, Silver, Aluminium, Copper, Zinc, Nickel, Tin, Lead • Energy resources such as Oil and Gas, Coal, Electricity • Agri commodities such as wheat, Sugar, Coffee, Cotton, Pulses and • Financial assets such as Shares, Bonds and Foreign Exchange. read less

A derivative is an instrument or agreement between two parties. A derivative is one which does not have its own intrinsic value. It takes its value from other asset like stock, index, commodity, currency etc and represents a future value of that particular asset. There are two kinds of derivatives traded on the floor of stock exchanges, futures and options, both have its own pros and cons. Like a trader, who trades in agri crops, may contact a farmer and agree to take all of his crops after certain months when ready at a fixed price. This way he has hedged his position to the future fluctuations of market in future and the farmer, has hedged his position against any unsold crops in the market if any. Both of them agree to buy or sell the crops which to be reaped in the future at a certain fixed price. read less