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Explain what a derivative is and give an example of how someone might use a derivative....

Explain what a derivative is and give an example of how someone might use a derivative. (Not sure if it is the same derivative in calculus but a question from a finance course)

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Answer #1

A derivative is a security which derives its value from underlying assets and it is a contract between 2 patties

The most common underlying assets are stocks and stock index (like dow jones industrial average, NASDAQ)

Some common derivatives are futures and options

And they are used to Hegde like some one who is long on stocks would like to hedge his position by buying put options or selling futures contract

And they also used as leverage to trading in markets

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