What are derivatives?

Derivatives are (artificial) financial products that derive their value from another product (underlying). Such an underlying could be pretty much anything that can have a value, e.g. commodities, stocks, or currencies.

Derivative contracts are traded for the future buying and selling of underlying. Derivatives can be binding for one person ((otc)option) or for both trading partners (in the case of futures, forwards, swaps).

There are two main reasons why investors invest in derivatives:

• To secure their portfolio (this is also called hedging)
• To speculate

This is possible because the investor only participates in the opportunities and risks of the underlying asset.

Let’s assume you want to benefit from a rising technology company. If the current stock price of the company is 10 Euro you could buy a derivative (which relates to the underlying stock in a ratio of 1:1) for 1 Euro. If the price of the stock rises 20 percent then your derivate will rise to 1,2 euros.