The Wandering Economist

If you were to listen to your nightly business newscast, you would think that the whole world was invested in derivatives. What exactly are they and how do they work? The short answer is that derivatives are contracts that are bought and sold against an item that has a concrete known value, but is not directly redeemable for that item. Instead it is redeemable for the gain or loss of that item over time. Think of it as playing the over/under dice at your local community festival, with the base value being set by some tangible object. Confusing? Sometimes. Complicated? Certainly.

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Tags: Finance //