What are financial derivatives? How do derivatives make money by investing?

Derivatives are contracts between two parties and many parties. Their values are defined in financial assets or asset portfolios, generally including creditor's rights, mass goods, currency, interest rates, market indexes and stocks.

Futures contracts, forward contracts, options, swaps, warrants and so on are very common derivatives, and these derivatives will be affected by contract performance because of their value, similar to stock options, but also derivatives, because their value comes from the value of stocks.

Although the value of derivatives is based on assets, derivatives do not own assets, only contracts. Derivatives belong to the field of advanced or technical investment and are used for speculative and hedging purposes.

Give a simple example, farmers and middlemen.

Farmers believe that the rainy season will affect the yield of harvested vegetables, thus affecting farmers' income. Therefore, farmers only signed a three-month contract with the boss of the middleman. The content is that the middleman must buy all vegetables with 10 yuan in the next three months. The middleman signed a contract to ensure the supply of goods. Although the two sides have reduced the risk through hedging, they still face the risk of price changes.

Farmers are guaranteed the contract value of the price, but the price may rise. For example, if the weather is fine and farmers have a very good harvest, they will eventually lose the extra income they can get. Similarly, the price of goods may fall, and middlemen have to pay more than the market price.

This is the use of futures contracts for hedging, so that farmers can focus more on vegetables, reduce concerns about price fluctuations, and middlemen can also ensure the supply of goods.