What are financial derivatives and what are their functions?

Financial derivative is a kind of financial product derived from financial instruments, and its value comes from the change of the price or index of the underlying asset, not directly from the value of the asset itself. Financial derivatives usually include options, futures, swaps and other types, which can be used for hedging risks, realizing speculative gains, managing asset portfolios and other purposes.

Specifically, financial derivatives have the following functions:

1. Risk management: Financial derivatives are an effective tool, which can be used to hedge different types of risks, including market risk, credit risk, interest rate risk and exchange rate risk. By buying and selling financial derivatives, investors can lock in prices and reduce risks.

2. Speculation: Financial derivatives can also be used for speculation. By buying and selling financial derivatives, you can get profits from price fluctuations in the market.

3. Price discovery: the price of financial derivatives is determined by the relationship between market supply and demand, and its price change can reflect the market's expectation of the underlying assets and the relationship between market supply and demand.

4. Asset allocation: Financial derivatives can be used to manage the portfolio, adjust the weight of the portfolio or hedge the risks in the portfolio by buying and selling financial derivatives.

Financial derivatives usually have the characteristics of high risk and high leverage. When using financial derivatives, investors need to carefully evaluate their risk tolerance to avoid unexpected losses.