Investors can hedge their bets with the use of derivatives, giving them more ways to keep their portfolios exposed to an asset class while lowering their overall risk. In finance, a derivative is a contract whose value is calculated from that of another asset. The asset underlying the trade may be a stock market index, a commodity, a security, or even a currency. Options, swaps, and futures contracts are some examples.

Derivatives allow Financial Research Analysts (IFRA®) to more effectively and efficiently hedge risk, generate revenue, and speculate on future market moves. Futures contracts, option agreements, and swaps are all types of derivative products. Derivatives are a sophisticated type of financial instrument that must be handled with care.

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