Derivatives are financial contracts whose value comes from an underlying asset, index, or rate. The most common types include futures, options, swaps, and forwards. Instead of owning the asset directly, such as a stock, bond, or commodity, investors use derivatives to gain exposure to price movements or to manage risks. Their worth is linked to the performance of the underlying item, which could be anything from crude oil prices to interest rates or stock indexes.

On Wall Street, derivatives serve several purposes. One major use is hedging, where companies or investors protect themselves against unfavourable market moves. For example, an airline might use fuel futures to lock in costs, shielding itself from sudden spikes in oil prices. Another common use is speculation. Traders use derivatives to bet on future price movements, often with leverage, which can magnify both gains and losses.

Derivatives also allow for arbitrage opportunities, where investors exploit price differences between markets to make profits. Additionally, large financial institutions on Wall Street use complex derivative strategies to manage portfolios, spread risks, and enhance returns.

While derivatives bring efficiency and flexibility to financial markets, they also carry significant risks. Misuse or excessive speculation can lead to instability, as seen in the 2008 financial crisis. On Wall Street, derivatives remain powerful tools, but they demand careful management and regulation.