Derivative (finance) - Usage

Usage

Derivatives are used by investors for the following:

  • provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative;
  • speculate and make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level);
  • hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out;
  • obtain exposure to the underlying where it is not possible to trade in the underlying (e.g., weather derivatives);
  • create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level).

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