What are "derivatives" in finance?

Derivatives in finance are defined as financial contracts whose value is based on the performance of underlying assets, which can include stocks, bonds, commodities, currencies, interest rates, or market indexes. This definition captures the essence of derivatives, as they derive their value from something else rather than representing the assets themselves.

For example, options and futures contracts are common types of derivatives. An option gives the holder the right, but not the obligation, to buy or sell an asset at a specified price before a certain date, while a futures contract obligates the buyer to purchase an asset at a predetermined price at a specified future date. The value of these contracts fluctuates with the price movements of the underlying assets, reflecting the changes in market conditions.

In contrast, the other answer choices do not accurately describe derivatives. Investments in tangible goods relate more to direct ownership of physical assets, while long-term savings products generally involve fixed returns over time, such as savings accounts or certificates of deposit. Foreign currency investments pertain specifically to the trading of currencies, and while they can involve derivatives, they do not encompass the broader category of financial contracts that derivatives represent. Thus, the correct choice precisely encapsulates the fundamental nature of derivatives in the financial landscape.