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Derivatives, in the context of finance, are complex financial instruments whose value is derived from an underlying asset, group of assets, or benchmark. These underlying assets can include stocks, bonds, commodities, currencies, interest rates, or market indexes. Derivatives are essentially contracts between two or more parties. The price of the derivative is directly linked to the price fluctuations of the underlying asset.

There are several common types of derivatives, including futures, options, forwards, and swaps. Futures contracts obligate the buyer to purchase an asset, or the seller to sell it, at a predetermined future date and price. Options give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. Forwards are similar to futures but are typically traded over-the-counter rather than on an exchange. Swaps involve the exchange of cash flows between two parties, often based on different interest rates or currencies.

Derivatives serve a variety of purposes in financial markets. They are widely used for hedging, which involves managing or reducing the risk associated with price fluctuations of an underlying asset. For example, a farmer might use futures contracts to lock in a price for their crops, protecting them from potential price drops. Derivatives are also used for speculation, where traders attempt to profit from anticipating future price movements of the underlying asset. Additionally, they can be used for arbitrage, exploiting price discrepancies between different markets. The use and trading of derivatives can be complex and carry significant risks.