Derivative Markets
Markets trading financial instruments (futures, options, swaps) derived from underlying assets.
Formula
Option Value = Intrinsic Value + Time Value
Real World
When oil prices became volatile in 2022, airlines such as Ryanair used fuel futures contracts to lock in prices months ahead, protecting profit margins from sudden crude oil price spikes.
Exam Focus
Specify whether the derivative is used for hedging (risk reduction) or speculation (risk-taking); examiners penalise conflation of the two.
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