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What are derivatives?

Derivatives are financial instruments that get their value from other investments like stocks and bonds. Examples include futures and options.

Futures are agreements between two parties to buy or sell an asset in the future at a price today. For example, airline companies may agree to buy oil at today’s price in case oil prices rise in the future. If oil prices fall in the future, the airline companies will experience a loss.

Options give investors the right to buy or sell an investment in a specified period. These financial instruments allow investors to hedge against price swings or protect against downside risk.