Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.4 · INTERMEDIATE · 2 MIN

Introduction to Derivatives

Derivatives are contracts whose value comes from an underlying asset. They are used for hedging risk, speculating on prices, and building complex investment strategies.

Quiz · 5 questions ↓
§ 01
DerivativeDefinitionKey Feature
FuturesObligation to buy/sell at a set price and dateStandardized, exchange-traded, margin required
OptionsRight (not obligation) to buy/sellPay premium upfront, limited downside for buyer
SwapsExchange of cash flows between partiesOTC, customized, used by institutions
ForwardsLike futures but OTC and customizedCounterparty risk, no exchange guarantee
§ 02

The global derivatives market is estimated at over $600 trillion in notional value. It dwarfs the stock and bond markets combined. Most of it is interest rate swaps used by banks and corporations to manage risk.

§ 03
Check the **Options** section for any ticker to see real derivative data in action.
§ 04

Derivatives are tools. In the hands of a hedger, they reduce risk. In the hands of a speculator using leverage, they amplify it. The instrument is neutral; the user determines the outcome.

§ 05
What's the core function of derivatives markets in the financial system?
Five questions · AI feedback

Sit with the ideas.

A company has $20 million in floating-rate bank debt at SOFR + 1.0%. They enter an interest rate swap where they pay 4.2% fixed and receive SOFR. What is their effective all-in borrowing cost after the swap?

Why:

Other lessons in this course.

  1. 01Treasury Securities Essentials
  2. 02Understanding Yield Curves
  3. 03Corporate Bonds & Credit Risk
  4. 04Introduction to Derivatives— reading now
  5. 05Repo Markets & Money Markets
  6. 06Mortgage-Backed Securities
See it on a real ticker →