Derivatives 101 -Week 1/12 of Financial Bootcamp!
Today we cover derivatives.
The term "derivatives" is often used in the world of finance. But for most people, it is just another example of complicated financial jargon. Often used, seldom understood. Let's fix that.
Here's Derivatives 101-
A "derivative" is just a contract with a value that is based on something else. Its value is DERIVED from something else.
If I create a contract called the SB that is linked to my # of Linkedin followers, that is a derivative. The contract value is derived from my followers.
In financial terms, derivatives is essentially a security that is tied to another asset - called the "underlying asset."
The underlying asset could be:
Stocks
Bonds
Commodities
Currencies
Interest Rates
Really anything can be an underlying asset. Get creative!
Derivatives can take on many different forms. The most common are:
Options
Futures/Forwards
Swaps
( We will cover the basics of Options in Options 101.)
Derivatives are widely used by investors. The most common use cases are:
Hedging - offset/protect a position
Speculation - bet on price moves
Leverage - amplify a position Naturally, using derivatives for a hedge is less risky than using them for leverage.
This was a very basic, 10,000-foot overview on derivatives, their common forms, and their use cases. We will cover the common forms in additional detail (with simple examples, of course!) in the future.
So that's Derivatives 101! We hope this was a helpful primer.
If you liked this, ask your friends to onboard to our list so they don't miss the upcoming ones! They can sign up here- lu.ma/advisoira
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