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Derivatives

Define a derivative and name three types of underlying markets.
Financial contract deriving value from: financial markets (rates, currencies, equities), commodity markets (gold, crude), or indices (Nifty, MIBOR).
What are the two main objectives of using derivatives?
Hedging (protect positions from adverse movements) and speculation (profit from anticipated price movements).
Name three key characteristics of derivatives.
Value changes with underlying asset, high leverage and complex pricing, settled at future date with little initial investment.
List four main functions of derivatives in financial markets.
Risk transfer, improve liquidity, better fund-raising avenues, increase market depth.
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