Exchange-traded Derivatives are financial contracts that are listed and traded on a regulated exchange. Derivatives offer investors the opportunity to hedge their exposures to stock or currency prices without affecting their standard of living. They also allow for speculative trading and can be used for financing business operations.First, some explanations are in order regarding the difference between a derivative and an option. A derivative is an agreement between parties that gives rise to a right to receive a definite price or to give rise to a certain price. It’s distinct from an option because options are contracts that give the owner the right, but not the responsibility, to buy or sell at a specified price at a future date. For instance, if you own an underlying stock, you could enter into an agreement to buy or sell its future shares at a specific price. These agreements are often referred to as futures contracts.Most traders use exchange-traded derivatives to hedge their risk by buying and selling contracts based on stock and currency values. They use these contracts to protect themselves from market changes and can even profit from trading strategies. This is because exchange-traded derivatives are standardized and traded in the secondary market (after they’re created). There are also synthetic versions of traditional derivatives that have new characteristics, such as nature protection or index replication.
