What is the role of financial derivatives in markets?

Financial derivatives are contracts whose value is derived from the price of an underlying asset, such as stocks, bonds, commodities, or interest rates. Common types of derivatives include options, futures, and swaps. These financial instruments allow investors to hedge risks, speculate on price movements, or increase leverage without directly owning the underlying asset. For example, a farmer may use futures contracts to lock in a price for their crop, protecting against price fluctuations. While derivatives can provide opportunities for risk management and profit, they can also be highly complex and risky, especially when used for speculative purposes.