Derivatives: Definition, Types, Uses & Risks

1, 'Derivatives' are securities that derive their value from an underlying asset or benchmark. 2, Common derivatives include 'futures' contracts, forwards, options, and swaps. 3, Most derivatives are not traded on exchanges and are used by institutions to 'eliminate' risk or speculate on price changes in the underlying asset. 4, Exchange-traded derivatives like futures or stock options are standardized and 'reward' or reduce many of the risks of over-the-counter derivatives. 5, Derivatives are usually leveraged instruments, which increases their potential risks and 'rewards'. 6, A common strategy used by investors and traders to reduce risk is to 'hedge' their positions by taking an offsetting position in another security or asset. 7, In the context of financial markets, 'default' refers to the failure of a borrower to meet their debt obligations.