Derivatives are financial instruments that derive their prices from the performance of other instruments, called underlying assets. For example, underlying assets could be equity, fixed income, foreign currencies, or commodities.
A derivative could also be defined as a contract between two counterparties to exchange payments linked to the prices of underlying assets. Derivatives are classified by their behavior or the type of instrument.
Categories of Derivatives
- Exchange-traded derivatives are those instruments that are traded in a stock exchange.
- Over-the-counter derivatives are instruments created and customized by the parties
involved.
The most common derivatives are futures, forwards, options and swaps.
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