What are derivatives and how do they work?

In a derivatives marketplace, individuals and businesses everywhere are able to lock in a future price by putting it into a binding contract. These products are called futures and options – contractual agreements to buy or sell an amount of something at a fixed price at a future date.

Are futures derivatives?

Yes, futures are derivatives as they derive their value from an underlying asset. For example, the price of energy fuel rises based on the price of crude oil. Thus, in this case, energy fuel is a derivative whose price varies with the cost of crude oil, which is the underlying asset.

What is a derivative agreement?

And because it’s a derivative, the value of this agreement is based on the predetermined and current price of the "something else." Below is a closer look at what each of those varieties mean. is an agreement between parties to buy or sell an asset at a predetermined price on a future date.

What are futures & how do they work?

Futures—also called futures contracts— allow traders to lock in the price of the underlying asset or commodity. These contracts have expiration dates and set prices that are known upfront. Futures are identified by their expiration month. For example, a December gold futures contract expires in December.