Financial derivatives are contracts whose value is based on (or derived from) the performance of an underlying asset, index, or interest rate. Common types include options, futures, forwards, and swaps.
Derivatives serve two primary purposes: hedging (protecting against risk) and speculation (betting on price movements). For example, an airline might use fuel futures to hedge against rising oil prices, locking in a fixed cost for fuel. Conversely, a speculator might buy oil futures expecting prices to rise.
The derivatives market is enormous — estimated at hundreds of trillions of dollars globally. While derivatives are powerful tools for risk management, they can also create significant risk when used irresponsibly, as demonstrated during the 2008 financial crisis.