A derivative is a financial instrument whose value is based on one or more underlying assets or indexes. These basic assets can be commodities, currencies, interest rates, stocks or other securities. The value of derivatives is linked to the performance of the actual underlying assets, but they do not directly own these assets.

Derivatives can be contracts, such as options, futures, swaps or more complex structured products. Option gives the buyer the right to buy or sell the underlying assets at a specific price on a specific date in the future, but it is not enforced. Futures is a contract in which buyers and sellers agree to deliver the underlying assets at a specific price on a specific date in the future. Swap is a contract in which two or more parties agree to exchange a series of cash flows.

The importance of derivatives market is that it provides opportunities for risk management, speculation and hedging. For example, farmers can sell futures contracts at the beginning of the planting season to ensure a specific price during the harvest season. In this way, no matter how the market price fluctuates, farmers can get the expected income. Speculators can use derivatives to predict market trends and profit from them. At the same time, companies can use derivatives to hedge business risks. For example, by purchasing options for goods related to its business, a company can lock in the cost of future purchases and avoid the impact of price fluctuations on its business.

However, derivatives also have risks. Because the value of derivatives is based on the performance of the underlying assets, if the price of the underlying assets fluctuates greatly, the value of derivatives will also fluctuate greatly. In addition, derivatives are usually leveraged transactions, that is, investors only need to deposit a small part of the contract value as a deposit, so investors may face huge potential losses. The global financial crisis in 2008 was partly attributed to the overuse and mispricing of derivatives.

Generally speaking, derivative instrument is a complex financial instrument, which can provide opportunities for risk management, speculation and hedging, but it also carries potential risks. Therefore, when using derivatives, investors need to fully understand their operating mechanism and potential risks, and make decisions according to their own risk tolerance and investment objectives.