What is a Derivative?
Derivative is a financial instrument which does not have any value on its own. For e.g. Apple juice can be called as derivative because it does not have any value or worth on its own, rather its value is taken from the value of apples. Similarly in capital markets, a financial derivative extracts its worth or value from any underlying asset on which it is based upon. The underlying asset can be stocks, bonds, commodities, currencies, interest rates, etc. Each derivative contract would have specific contract/lot size, expiry date and price at which the contract would be settled.
The first official derivatives came in the year 1848 in CHICAGO. It was a customized contract named forwards where the underlying asset was wheat as a commodity. The key reason for the evolution of such instrument was to reduce the risk of price volatility between producers and consumers of wheat.
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