Derivatives contracts whose value derives from underlying assets like stocks, commodities or interest rates provide versatile tools for hedging, speculation and arbitrage. Common instruments include forwards, futures, options and swaps. For example, a wheat farmer might lock in future prices with a forward contract to mitigate crop‑price volatility, while an airline might use fuel‑price swaps to stabilize operating costs. Options, which grant the right but not the obligation to buy or sell an asset, offer asymmetric risk profiles attractive to risk‑averse participants.
Beyond individual hedges, corporations weave derivatives into comprehensive risk‑management frameworks. Regulators often require banks to hold capital against derivative exposures, yet these same instruments can reduce capital strain by offsetting underlying risks. Structured products combine multiple derivatives to customize payoff profiles such as capped yields or principal guarantees tailored to investor objectives. While potentially complex, derivatives empower organizations to isolate and manage individual risk factors with precision.