A derivatives market is a financial market where financial instruments like futures contracts or options are traded, which are derived from other forms of assets. The market can be divided into two categories: exchange-traded derivatives and over-the-counter (OTC) derivatives. Exchange-traded derivatives are standardized contracts that are traded on an exchange, while OTC derivatives are tailor-made contracts that are traded on over-the-counter markets. The derivatives market serves as a platform for participants to manage risk, speculate on price movements, and gain exposure to different asset classes.

Some key points about the derivatives market include:

• Derivatives can be used to either mitigate risk (hedging) or assume risk with the expectation of commensurate reward (speculation) .
• Derivatives can be used to trade any number of assets and carry their own risks. Prices for derivatives derive from fluctuations in the underlying asset.
• The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.
• Derivatives can be bought or sold over the counter or on an exchange.
• The derivatives market plays a crucial role in global finance, contributing to market liquidity, price discovery, and efficient capital allocation.

Participants in the derivatives market include investment banks, hedge funds, commercial banks, government-sponsored enterprises, and others. The derivatives market is a complex type of financial security that is set between two or more parties. Derivatives allow investors to gain exposure to asset prices without directly owning the assets. The derivatives market enhances market stability by allowing participants to hedge their risk exposure and protect against adverse price movements.