What are derivatives in finance?

Derivatives in finance are defined as financial instruments whose value depends on the price of one or more underlying assets. This could include stocks, bonds, commodities, interest rates, or even market indices. The primary utility of derivatives lies in their ability to provide risk management strategies, leverage investment positions, or speculate on the future price movements of the underlying assets.

By understanding that derivatives derive their value from something else, one can appreciate the specific types of derivatives that exist, such as options and futures contracts. These structures allow traders and investors to hedge against potential price fluctuations or to gain exposure to the underlying asset without directly holding it.

The other options are focused on financial instruments that do not exhibit the key characteristic of being dependent on other assets for their valuation. For instance, assets with independent values or mutual funds that do not maintain a direct relationship with specific underlying securities would not fit the definition of derivatives. Stocks that provide fixed returns likewise do not correlate with the foundational concept of derivatives, as their values are not contingent upon other financial assets.