Derivatives are financial contracts whose value is determined on the basis of the price of an underlying instrument such as equities, bonds, foreign exchange, precious metals or base materials. These contracts contain the right or the obligation to receive or make future deliveries, or to receive the corresponding underlying assets at specified conditions. As such, they can be regarded as an alternative to equivalent investments although their risk/return profile may be structured differently.
High returns with clearly higher risk potential
With derivatives large sums are often controlled through the deployment of small amounts of capital. Consequently, price fluctuations can have a disproportionate impact on a derivative. This so-called leverage effect provides not just high earnings opportunities but also higher risk levels, which the investor must take into consideration.
Basically, there are three groups of derivatives: forward transactions (futures), options and swaps.
