Derivatives are financial instruments whose value is derived from an underlying asset such as a commodity, currency, or stock. A derivative is a contract between two parties that specifies conditions to buy or sell the underlying asset at a future date. There are several types of derivatives including forwards, futures, options, and swaps. Forwards are customized contracts negotiated between two parties, while futures are standardized contracts traded on an exchange. Derivatives are used by hedgers to reduce risk, speculators to seek profits, and arbitrageurs to exploit pricing discrepancies across markets.
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