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What Is A Derivative?

A derivative is a financial contract between two or more parties, whose value is determined from the value of another underlying asset. Derivatives come in a variety of types, the two most common being futures and options.

These instruments are often used to mitigate the risk that one of the parties in the contract seeks to hedge against, while allowing the other party in the contract the opportunity to gain a higher return on their investment in the contract. With higher risks come higher gains, and mitigating risks (by contracting them away to the other party) comes at a cost.

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