Saturday, December 25, 2010

Derivative

A derivative is some sort of financial instrument that derives its value from the price of one or more underlying instruments (e.g. indexes, stocks, currencies, other derivatives). Derivatives can be used to alter exposure to prices; one can use derivatives to create or obtain an exposure to a price, or reduce or hedge an exposure to a price. For example by using stock index futures an investor can short stock index futures to lower/reduce the beta of a portfolio, effectively insuring the portfolio; but at the same time eliminating price exposure - so also preventing any further gains. Derivatives are very useful financial contracts, however investors need to be completely clear on the costs and benefits, and the nature of the exposure.

Synonyms: Options, Futures, Financial Contracts, Financial Instruments, Swaps
 
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