Financial derivatives are financial tools that consider the future price of something and their value is determined by the fluctuation in future price expectations. Future derivatives are associated with equities, currency and commodities. The investors and traders buy a financial derivative as per their calculation of the future price of the item in question. If their estimate is close to the future price, they earn a profit over their investment.

Financial derivatives ensure a leverage or gearing to the investor. A small fluctuation in the price brings about a lot of difference in the value of the financial derivative. The investor profit if the price of the commodity/ security or currency moves in a desired direction. One can buy if the price hits a high level, stays within a specific price range, or drops below the bottom marked. The working of financial derivatives is vast, and the scope immeasurable.

Indulging in derivatives ensures security to the investor, as the investor who has a bulk stock of a particular share, commodity or currency, but the market conditions signify a fall in price, the investor can smartly buy a lower price in future. If the price rises, he/she buys from the stock accumulation, while the derivatives bring profit in case of price fall.

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