Derivatives What Are They, And What Are They Used For?
A derivative is a financial instrument that can be traded either on or off of the stock market. They can be used in options trading, and can be used to exchange a floating rate of return for a fixed rate of return. In very simple terms, a derivative is measuring the rate at which something changes in comparison to something else.
Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or exchange a floating rate of return for a fixed rate of return.
A derivative can be looked at as a payoff with one or more underlying variables. The payoff can be now or at some time in the future, and the underlying variable can be related to such things as stock prices and indexes, bond prices and interest rates, foreign currency exchange rates, commodity prices, as well as events that cannot be controlled such as earthquakes and hurricanes.
Even though many people are not able to understand what derivatives are, or how they work, they are quite simply explained by using events and occurrences that everyone is...
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