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Investing: Derivatives Explained

by | Dec 29, 2020 | Economy

This series of videos by explains what financial derivatives are. They are contracts whose value is based on the value of another asset. A recent video by Ivan On Tech explained there is massive opportunity in Ethereum derivatives, so it helps to know what derivatives are in the first place. This first video by Takota Asset Management uses an example of wheat farmers benefiting when the price of wheat is high, and cereal manufacturers benefiting when the price of wheat is low. Farmers and cereal companies enter a contract to lock the price of wheat in the middle so they each can hedge their risk. Speculation is the opposite of hedging, in that there is greater risk, but also greater potential investment gains.

Two types of derivatives are futures and forwards. This video by Binance Academy explains that they allow traders to speculate on the future price of an asset. This is common in the commodities market.

Options are another type of derivative. They are contracts allowing the recipient the right, but not the obligation, to act on a future transaction. This video by Invest Owl explains them with several great examples. Stock options are heavily used by corporate executives to increase their income.

The fourth and final type of derivative are swaps. Swaps are when someone trades a high risk contract to someone for one with a fixed rate, or vice versa. This video by Marketplace APM explains with another example.

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