From the course: Derivatives Fundamentals
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What are derivative contracts?
From the course: Derivatives Fundamentals
What are derivative contracts?
- [Presenter] So what is a derivative contract? Well, to understand a derivative contract, we also need to understand more broadly what derivative markets are meant to do. When you hear the term "market," what comes to mind? It might be the capital markets, but it could be a flower market or a vegetable market. Markets are used to transfer goods, services, funds, and even risk. When we talk about a derivative market, we're talking about a market that has been developed over time to transfer risk from one party to another. For example, a company may wish to transfer risk related to some foreign currency exposure they have from trading overseas, or it could be a fund manager who may wish to speculate on the direction of a currency, taking on risk to add returns to their fund. The transfer of risk from one party to another is done often through a derivative contract, which can be seen in simple terms as a bet on which way a particular number, such as the price, may move in the future. A…
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