Derivatives provide businesses and investors with a number of potential advantages. These include being able to lock in prices, hedge against certain risks, and access limited markets.
An investor may purchase a derivative contract whose value moves in the opposite direction to the value of an asset that they already own, to offset potential losses in that asset – thus minimizing risk.
Accessing limited markets is beneficial as the investor can take advantage of certain opportunities i.e. using a swap, an investor could access lower interest rates in a country otherwise off-limits to them.
Specifically using options, allows investors to speculate on the future value of an asset, without committing to buying or selling it. Although options can be expensive, the potential returns can be significant.
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