From the course: Finance and Accounting Tips

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What is a derivative?

What is a derivative?

From the course: Finance and Accounting Tips

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What is a derivative?

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- Let's suppose you're going on a vacation to Costa Rica. That would be awesome. The currency in Costa Rica is called the colon. It was one of the most beautiful currencies in the world. So you've planned ahead, and booked a villa six months from now. The cost of the villa for the week is 550,000 colones. That sounds like a lot, but don't panic just yet as the exchange rate currently is about one US dollar equals 570 colones. That converts to about 965 US dollars, payable when you get there. But the risk to you is that exchange rate will change between now and when you go on your trip. And depending on which way the exchange rate goes, you could end up paying more or less than 965 US dollars, perhaps significantly more. And that brings us to the topic of derivatives. A derivative is a contract that derives its value from the movement of the price, exchange rate, or interest rate on some underlying asset or financial instrument. Now, most firms use derivatives as a tool for managing…

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