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What is a derivative?

What is a derivative?

A derivative is a security which monetizes the risk or volatility associated with a reference asset.

Derivatives derive their value from speculation surrounding an underlying or reference asset. The reference asset could be another security, an interest rate, or an index, for example, but there are also derivatives based on future weather patterns.

Derivatives come in many forms; examples include options, swaps, and futures. Some derivatives trade on exchanges and some are Over-the-Counter (OTC). Derivatives might be used for speculation or hedging.

Keywords: hedging, security, implied volatility, derivatives, interest rate, derivative, speculation, over-the-counter (OTC),