What are financial derivatives?

From the economic point of view, financial derivatives are cash flows that are conditioned stochastically and discounted to present value. The market risk inherent in the underlying asset is attached to the financial derivative through contractual agreements and hence can be traded separately.

Why do traders use derivatives?

Traders use derivatives to access specific markets and trade different assets. Typically, derivatives are considered a form of advanced investing. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. Contract values depend on changes in the prices of the underlying asset.

What is a derivatives contract?

Derivatives contracts are related to the "spot" markets where the underlying assets trade for immediate delivery. However, they are also quite different, as they layer on specific terms, such as a fixed price to buy or sell an asset or a set length of time to execute the contract. How Do Derivatives Help Manage Risk?

Is a derivative an asset or a liability?

Based upon movements in the underlying asset over time, however, the value of the contract will fluctuate, and the derivative may be either an asset (i.e., "in the money") or a liability (i.e., "out of the money") at different points throughout its life.