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Use of derivatives: why or why not?

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What is the definition of a derivative and give an example. What is one way you would use derivatives?

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Solution Summary

The solution explains the general definition of a derivative following by an example of using a covered call to demonstrate the use.

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The definition of a derivative: " is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency.

Examples of derivatives include futures and options.

They can be used for protection against downside risk, but they also can be used to generate income. Buying and selling options is a risky and fast ...

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