INVESTOPEDIA EXPLAINSFutures contracts,forward contracts,options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data,such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk,but can also be used for speculative purposes. For example,a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk,the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.
Let's practice our knowledge of derivatives - Read The Barnyard Basics of Derivatives and Derivatives 101
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