Derivative trading is a financial practice that involves buying and selling derivative contracts for the purpose of speculation. Derivative contracts are short-term financial instruments with a fixed expiry date. They are agreements between two or more parties based on the value of one or more underlying assets.
Derivative contracts can be used to trade on the price movements of an underlying market without purchasing the asset itself. For example, in the stock market, derivatives can be used to adjust for price risk.
The underlying asset can be stocks, commodities, currencies, indices, exchange rates, or interest rates.
Derivative contracts can help reduce market transaction costs by working as risk management tools