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Derivatives Basics
 
Derivatives

Derivatives are financial contracts between two or more parties whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as interest rates, exchange rates, commodities, bonds and equities. Derivatives include a wide assortment of financial contracts, including forwards, futures, swaps and options. Most derivatives are characterized by high leverage.

Since derivatives are mere contracts, just about anything 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 to hedge risk, but can also be used for speculative and arbitrage purposes.

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