What are derivatives?

Derivatives are financial contracts whose value is derived from the price of an underlying asset, which could be stocks, bonds, commodities, currencies, or interest rates. This means that the performance of the derivative is dependent on the fluctuation of these underlying assets. Common types of derivatives include options, futures, forwards, and swaps.

The essence of derivatives is to enable investors to hedge risk, speculate, or gain access to assets or markets without needing to buy the underlying asset outright. For example, a futures contract allows an investor to agree on a price today for a commodity to be delivered in the future, thus they can benefit from price changes without having to own the commodity directly.

The other options describe different financial instruments that do not share the characteristic of being contracts based on other asset prices. Equity securities represent ownership in a company and do not derive their value from another asset. Debt instruments are loans made to corporate entities, representing a claim on future cash flows rather than being dependent on another asset's price. Currency pairs are direct representations of the value of one currency in relation to another and are not categorized as derivatives themselves.