by 
The Curious Bag
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The Securities and Exchange Commission defines derivatives as instruments that derive value from the performance of an underlying asset. Options and futures are types of derivatives that investors use to manage risk, and they are priced according to the price movements of investments they protect.
Function
Options and futures enable investors to lock in prices for a particular asset for a set period of time. Options grant holders the choice of accepting a predetermined price. Futures are binding contracts that enforce settlement.
Benefits
Options and futures allow investors to hedge, or anticipate profits and minimize losses. These products trade upon organized exchanges and may be bought and sold quickly.
Size
In June 2009, the Bank for International Settlements estimated the size of the derivatives market, which includes options and futures, at $605 trillion. For comparison, the U.S. economy was valued at $14 trillion at that time.
Considerations
In exchange for their flexibility, investors must pay relatively high up-front costs, or premiums, to buy options.
Misconceptions
Options and futures are generally associated with high levels of risk. However, most investors use them conservatively to neutralize volatility.
Warnings
Unexercised options expire and are worthless.
Source:
SEC: Commodity Futures Trading Commission
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