Customize Consent Preferences

We use cookies to help you navigate efficiently and perform certain functions. You will find detailed information about all cookies under each consent category below.

The cookies that are categorized as "Necessary" are stored on your browser as they are essential for enabling the basic functionalities of the site. ... 

Always Active

Necessary cookies are required to enable the basic features of this site, such as providing secure log-in or adjusting your consent preferences. These cookies do not store any personally identifiable data.

No cookies to display.

Functional cookies help perform certain functionalities like sharing the content of the website on social media platforms, collecting feedback, and other third-party features.

No cookies to display.

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics such as the number of visitors, bounce rate, traffic source, etc.

No cookies to display.

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

No cookies to display.

Advertisement cookies are used to provide visitors with customized advertisements based on the pages you visited previously and to analyze the effectiveness of the ad campaigns.

No cookies to display.

Skip to content
Home » What is the purpose of derivatives?

What is the purpose of derivatives?

Derivatives play a crucial role in the financial world, primarily serving the management and mitigation of risk. These financial instruments offer a means for parties to hedge against various risks associated with their commercial activities. For instance, entities may utilize derivatives to protect themselves from fluctuations in currency exchange rates or interest rates over a specified duration. By entering into derivative contracts, parties aim to alleviate the impact of such risks on their financial positions.

Moreover, derivatives enable investors and traders to engage in speculation and profit generation. These instruments provide opportunities to capitalize on the anticipated movements in underlying assets’ prices without directly owning those assets. Through derivatives such as futures and options, participants can take positions on diverse assets, including stocks, commodities, and currencies, amplifying their potential for gains or losses based on market movements.

In addition to risk management and speculation, derivatives contribute to liquidity and price discovery in financial markets. They facilitate the flow of capital by providing avenues for trading and investment, enhancing market efficiency. Furthermore, derivatives markets often serve as leading indicators of broader market sentiment and trends, aiding in price determination across various asset classes.

(Response: The purpose of derivatives encompasses risk management, speculation, and contributing to liquidity and price discovery in financial markets.)