Derivatives

Derivatives are financial instruments that derive value from an underlying something--be it assets stocks, bonds, interest rates, commodities, real estate, currency, stock market indexes or even the weather. Options, swaps, futures and forwards are examples of derivatives. Derivative provide exposure to an asset without direct ownership of the asset. Derivatives are opaque, complex and in many cases lightly regulated. Professional investors use derivatives to speculate, hedge their bets, lock-in prices or leverage potential returns. For example, a gold futures contract gives you control over thousands of dollars of precious metal for a cash layout equaling a fraction of its total value. Since the 2008 global financial crisis, derivatives have been given bad press. As far back as 2002, Warren Buffett described them as “financial weapons of mass destruction.”