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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 ↓

Compare

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

Key point

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.

Try it

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

Key insight

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.

Check-in

What's the core function of derivatives markets in the financial system?
Check your understanding

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:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

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
Continue this lesson in the app →See it on a real ticker →