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).
Read more about this topic: Derivative (finance)
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