Derivatives are contracts that derive their value from another financial instrument or other underlying assets. Whereas houses are assets whose value is derived from its use to homeowners, houses are not derivatives as they are not financial instruments. Stocks are a type of financial instrument, but they derive their value from the underlying profitability of a firm—rather than another financial instrument—and are not generally considered to be derivatives. Forward contracts, however, are derivatives as they are promises to exchange goods in the future at prices determined today.
Derivatives are neither good nor bad, they are tools. They mitigate or transfer risk, and they facilitate economic calculation. Once again, financial ...
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