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A financial instrument whose value is derived from the performance of an underlying asset, index, or rate.
Common derivatives include options, futures, forwards, and swaps. They serve three primary purposes: hedging risk, speculating on price movements, and gaining leveraged exposure. The global derivatives market is enormous, with a notional value exceeding $600 trillion. A farmer might use futures contracts to lock in a price for next season's crop (hedging), while a speculator might buy the same futures contract betting on a price increase. The 2008 financial crisis highlighted the dangers of complex derivatives like credit default swaps when counterparty risk was poorly understood.