Introduction to derivatives Market definitions

Derivatives are financial instruments that derive their value from an underlying asset, such as a stock, bond, commodity, or currency. Derivatives markets exist to facilitate the trading of these financial instruments.

Here are some common definitions related to derivatives markets:

Derivative: A financial contract that derives its value from an underlying asset.

Underlying asset: The asset on which a derivative contract is based, such as a stock, bond, commodity, or currency.

Futures contract: A derivative contract in which two parties agree to buy or sell an underlying asset at a predetermined price and date in the future.

Options contract: A derivative contract in which the buyer has the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date in the future.

Swaps contract: A derivative contract in which two parties agree to exchange cash flows based on an underlying asset or benchmark, such as an interest rate or currency exchange rate.

Exchange-traded derivatives: Derivatives contracts that are traded on organized exchanges, such as the Chicago Mercantile Exchange or the New York Stock Exchange.

Over-the-counter (OTC) derivatives: Derivatives contracts that are privately negotiated between two parties, such as banks or hedge funds.

Derivatives market: A financial market in which derivatives contracts are bought and sold.

Derivatives markets play an important role in risk management and price discovery, allowing investors to hedge their risks or speculate on future price movements of underlying assets.