A derivative is a financial instrument whose value depends on (or is derived from) the value of an underlying. The underlying can either be stocks, bonds, interest rates, commodities or foreign exchange. Derivatives’ main categories are options, swaps, forwards and futures. Derivatives enable a wide range of underlying exposure, such as leveraged exposure, short exposure or even customised exposure (with the use of options). In contrast to their flexibility, derivatives may involve counterparty risk.
The duration of a bond is a measure of time (in years) expressing either:
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