What is the purpose of a derivative contract in the investment process?

Derivative contracts are a type of financial instrument used to manage risk and maximize potential profits in investment processes. In simple terms, they can be thought of as a way to "hedge" or protect your investment from potential losses. Derivative contracts essentially transfer risk from one party to another. When an investor uses a derivative contract, he or she enters into an agreement with another party to purchase or sell a specific quantity of an asset at a set price in the future. This locks in the price of the asset, thus protecting the investor from any future market fluctuations. Derivative contracts also allow investors to speculate and leverage their investments without necessarily having to put up the capital needed for actual purchases of the asset. For example, an investor could use a derivative contract to speculate on the future price of a stock without actually buying the stock, which could help him or her earn profits even if the stock price decreased. In Wisconsin, all derivatives must be traded on a regulated exchange or between two parties that are registered with the Commodity Futures Trading Commission (CFTC), which oversees the trading of derivatives in the US. This helps ensure that derivative contracts are properly monitored and regulated to protect investors’ interests.

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What is the purpose of a derivative contract in the investment process?

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