【Derivatives】Explanation of Basic Word

Derivatives Basics: Futures, Options, and Perpetual Futures

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “Derivatives.”

Please watch until the very end!

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Why do derivatives feel so difficult?

When people hear the word “derivative,” they often think of complex and difficult financial instruments. Indeed, the media frequently reports on derivatives as the cause of failures and losses. However, their essence is surprisingly simple. A derivative is nothing more than a mechanism for trading future risks.

The history of derivatives’ emergence reveals their very essence. In medieval Europe, farmers worried about grain price fluctuations until harvest time. Meanwhile, bakers and merchants sought to lock in future grain prices. When these two parties with conflicting interests began trading, the first derivatives were born.

In other words, derivatives are a technology that transforms “someone’s risk” into “another’s speculative opportunity.”

What are Derivatives? (Overview)

The definition of a derivative is “a financial instrument whose value depends on the price of an underlying asset.” Any asset subject to price fluctuations—such as stocks, commodities (grains, oil, etc.), indices (Nikkei Average, S&P 500, etc.), and cryptocurrencies—can be the subject of a derivative.

To understand the essence of derivatives, the perspective of “risk transfer” is essential. One party holds a risk, and another party assumes it. That exchange process is the entirety of derivatives.

For farmers, falling grain prices pose a fatal risk, but for speculators, they present a profit opportunity. The derivatives market is where this exchange of “unpleasant risk” and “favorable speculative opportunity” takes place.