Derivatives: What is good to know before investing?
Derivatives are essentially contracts whose value is derived from the underlying asset. The underlying asset can be a financial asset or a commodity. The value of the underlying asset is constantly changing according to market conditions. Financial Derivatives: Derivatives derived from financial assets are known as financial derivatives. Financial assets include stocks, interest rates, currencies, index, etc. For example, stocks are derivatives whose underlying asset is the stock. Commodity Derivatives: Commodity derivatives are derived from a physical commodity. A physical commodity means commodities like oil, milk, etc. For example, if the price of milk increases, the price of ice cream and butter will increase. In this case, milk is the underlying asset and a change in the price of the asset changes the price of things derived from it. Similarly, if the price of crude oil increases, so will the price of petrol and diesel. Crude oil is the underlying asset and gasoline and diesel