What is a common type of derivative in financial markets?

Options contracts are a common type of derivative because they derive their value from an underlying asset, such as stocks, commodities, or currencies. In essence, an options contract gives the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined price before a specified expiration date. This characteristic makes options useful for hedging against volatility and managing risk in investment portfolios.

In financial markets, derivatives like options are used frequently for speculation, investment strategies, and risk management. The complexity and flexibility of options contracts allow investors to design strategies that can profit from various market conditions, making them a vital tool in finance.

In contrast, other options such as bond contracts, savings accounts, and equity shares do not function as derivatives. Bond contracts are agreements to pay interest on debt, savings accounts represent a claim to a bank’s liabilities and do not derive their value from another asset, and equity shares represent ownership in a company rather than a derivative relationship.