Derivative

Derivative in Europe

Derivative (in Finance)

In this field, Derivative means the following: Derivatives can be formed as futures contracts, option contracts, swap agreements etc. The price of a derivative is dependent on an underlying asset. Derivatives create a market for the risk of an underlying asset. As an example a company might want to sell a large amount of commodities but has to wait until next year. If the company does not want the uncertainty of the asset value in one year they can choose to sell the risk of a price change to someone willing to hold it. The price is locked at today's level and the risk for the company is decreased while an investor is able to make a possible gain if the asset price goes up during the year. The exemplified type of derivative is called a future's contract.

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