What are derivatives in the context of finance?

Derivatives in finance are financial contracts whose value is derived from the performance of an underlying asset, index, or rate. This underlying asset can be anything from stocks, bonds, commodities, interest rates, or currencies. The key feature of derivatives is that they allow investors to speculate on future price movements of these underlying assets, hedge against risks, or enhance returns.

For example, options and futures are common types of derivatives that can help traders position themselves based on market expectations or to hedge against potential losses in their investment portfolios. Since derivatives can be highly leveraged, they carry a unique set of risks and rewards that differ significantly from direct investments in stocks or other fixed-income securities.

This understanding of derivatives is crucial as they play a significant role in modern financial markets, enabling a wide range of strategies from risk management to speculation. The other options provided do not capture this essential characteristic of derivatives, instead addressing more traditional forms of investments or savings.