What are derivatives in financial markets primarily used for?

Derivatives in financial markets are primarily utilized to derive value from an underlying asset. This financial instrument gains its worth from the performance of an underlying asset, which can be stocks, bonds, commodities, currencies, interest rates, or market indexes. The essence of derivatives lies in their ability to facilitate speculation, hedging, and risk management.

For instance, if investors foresee changes in the price of an underlying asset, they can use derivatives, such as options or futures, to capitalize on those anticipated fluctuations without having to directly own the asset. This mechanism allows them to manage their exposure to the risk associated with price movements. Consequently, the primary function of derivatives revolves around their relationship with the underlying asset, making this understanding crucial for anyone engaging in financial markets.