This lesson introduces derivative instruments—financial contracts whose value is derived from an underlying asset—and their use in risk management and speculative strategies .

6.1 Key Derivative Types
Derivatives can be categorised into: Futures contracts (standardised, exchange-traded), Forward contracts (customised, OTC), Options contracts (right but not obligation to buy/sell), and Swaps contracts (exchanging cash flows) . Students differentiate between OTC and exchange-traded markets .

6.2 Pricing and Use
Derivatives are valued using the no-arbitrage principle . They are used for risk management (hedging), speculation, and arbitrage. In the context of stock markets, students discuss how regulators incentivise ethical behaviour and how regulation can improve market efficiency .

6.3 Specific Derivative Markets
Key markets include: Interest rate swaps and yield curve estimation , Equity futures and option markets , and Credit markets (corporate bonds, credit default swaps, collateralised debt obligations) .