Economic Derivative

Every math geek in finance loves derivatives. You might be familiar with the general term “derivative,” which is a financial contract based on an underlying asset...the asset it’s “derived” from (just like a derivative in calculus). Besides being another tool to make money with, financial derivatives are a tool investors can use to offset and manage their risk. Take on some risk, offload some risk, it’s up to you...as long as you’re willing to pay for it.

An economic derivative is like a financial derivative, except...different. While financial derivatives are usually based on an underlying asset—like a stock—economic derivatives are based on economic indicators. Think: the unemployment rate, GDP, retail sales, etc. Economic derivatives are an all-or-nothing kind of deal as far as payouts go.

Just like financial derivatives, economic derivatives help investors spread out their risk. For instance, an investor can take a certain type and amount of risk in their portfolio, and offset that risk with an opposing economic derivative...basically by betting...er, speculating...on the economy.

Wanna see one for yourself? You can check them out on an exchange, which has been a thing you could do since 2002. Who knew?