Derivatives Education Hub

Derivatives are financial instruments whose value is linked to an underlying asset, market or benchmark. The underlying asset could be a stock index, government bond, ETF, commodity or other financial instrument.

Investors use derivatives for different purposes, including expressing a market view, managing risk during periods of market volatility and gaining market exposure without directly buying the underlying asset. 

Futures are one of the most widely traded types of derivatives. A futures contract is a standardised agreement traded on an exchange that enables market participants to gain exposure to the price movements of an underlying asset at a future date.

Options are a type of derivative that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified period. The buyer pays a premium for this right.

Like other derivatives, the value of an option is linked to an underlying asset, such as a stock, index, bond, commodity or currency. 

There are two main types of options: 

1. Call options, which give the holder the right to buy an asset. 
2. Put options, which give the holder the right to sell an asset. 

Investors may use options for a variety of purposes, including expressing a market view, managing risk or gaining exposure to a market in a different way from purchasing the underlying asset directly. 

Before investing in options, it is important to understand how they work, their characteristics and the risks involved. 

Investors use derivatives for a variety of reasons: 

• To gain exposure to a market without directly buying the underlying asset 
• To express a view on rising or falling markets 
• To manage or hedge existing investment positions 
• To react efficiently to changing market conditions