A derivative is a financial contract with a value that is derived from an underlying asset. Derivatives have no direct value in and of themselves -- their value is based on the expected price movements of their underlying asset.

Why would a trader use derivatives?

There are 4 benefits of trading derivatives:

  1. Hedging and better risk management

  2. Low Transaction costs

  3. Exposure: Traders can bet against an asset’s performance without owning it

  4. Leverage: Traders can enter positions that are larger than their account balance