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Investment term of the day: derivative

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A complex term used often but rarely explained, a derivative is a financial contract that is valued in relation to another asset (i.e. it derives its value from elsewhere).

The contract usually takes place between an investment or commercial bank and a customer under specific conditions (including dates, underlying variables – such as commodities, stocks and bonds – and so on). Payments are then exchanged between the two parties.

Derivatives are generally used as a risk management tool (to ‘hedge’ against a certain event) or speculation (to bet on a particular event). They are defined broadly as an ‘option’ product.

Investopedia definition.

Wikipedia page.

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