I’m aware of what a debt, equity, shares, bond and securities are. But I’m having some trouble understanding derivatives.
In: Economics
You bet 50 dollars on black at a casino.
I make a 50 dollar bet with a dude named kyle that, you are going to win.
Adam makes a 100 dollar bet with Sarah that kyle is going to win (which basically means he is betting on you loosing.)
That is a deeivative.
A derivative is a bet structured on the value of some other security. A common example is a “future,” which is a bet on what the value of a security will be on an expiration date in the future. As the expiration gets closer, the price of the future will approach the price of the underlying security.
A more complicated example is an “option,” which is an instrument that gives you the right to buy or sell a stock at a certain price on or before the expiration date. For example, an option to buy Apple stock at a price of $350 on or before the end of the year has some value today. If Apple is worth more than $350 on the expiration date, the option has value because you can buy the stock for $350 and sell it for more. If Apple is worth less than $350 on the expiration date, the option expires worthless.
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