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Glossary
Instruments

Derivative

A contract whose value is derived from something else.

Options, futures, swaps and forwards are all derivatives: their value depends on an underlying asset such as a share, a currency, or a barrel of oil. You are not trading the thing; you are trading a contract about the thing.

They exist to transfer risk, which is genuinely useful: a farmer locks in a price, an airline hedges fuel. They are also the most efficient mechanism ever devised for losing more money than you have, because most of them embed leverage.

Figure

Why the debt is the engine

Debt 70secured on the targetEquity 30+30%Debt 70, unchangedEquity 60, doubled

Put in 30, borrow 70, secure the loan against the company you are buying. A 30% rise in the business doubles your money. The same arithmetic works in reverse, which is why buyouts fail loudly.

Why it matters

They are the plumbing of modern markets, and the source of most of its spectacular accidents.

The mistake everyone makes

Using them for speculation while believing you are hedging.

Related terms

Option
The right, but not the obligation, to buy or sell at a set price.
Futures
A binding agreement to buy or sell something at a set price on a set date.
Hedge
A position taken to offset a risk you already have.

See Derivative on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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