Economics Derivatives Questions
Derivative instruments are financial contracts or securities that derive their value from an underlying asset or reference rate. These instruments are used to manage or hedge risks, speculate on price movements, or gain exposure to various financial markets. Derivatives can be classified into four main types: futures contracts, options contracts, swaps, and forward contracts. They allow investors to take positions on the future price or value of the underlying asset without actually owning it. Derivatives provide flexibility, liquidity, and the potential for higher returns, but they also carry risks, including counterparty risk and market volatility.