1. You buy a security
2. This security follows a currency
3. Soon when that currency goes up
4. The value of your security will go up
5. This all equals derivatives
Let’s break this down
You are searching for alternative investments and you think about getting into this security that follows the price of a currency, so when the currency value goes up the security itself will go up as well. As well as when the currency value goes down then your security will go down as well. This all equals a derivative
A derivative is a security that you can buy as an investor, this securities value is based on and derived from other assets, such as stocks, bonds, currencies and much more. Right now, for example, there are derivatives that are based on Bitcoin.
Why Do You Care
• They can be used for Hedging, which is essentially helping you protect your investments that are in foreign currency. You would buy a foreign currency derivative to protect your downside if the currency dropped.
• Speculation is another very common use case, as people buy derivatives of gold and most recently Bitcoins.
• Most common use cases are Future Contracts, where you agree to the sale of a company at a set price.
The Good, The Bad, The Ugly
• This is a great way to get into speculative asset classes without taking on all the risk (The Good)
• These are often confusing and so many different asset classes that you can invest in that it is hard to understand what and what is not a good investment (The Bad)
• You can not control what the other assets do, such there is a lot of volatility (The Ugly)