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Any instrument that derives its price from another asset is called a derivative. Derivatives are extremely powerful instruments because they can either reduce or increase the risk of any investment. This means that an investor can "hedge" their portfolio to make certain that, no matter what events may occur, the portfolio will not lose a specific amount of principal. The investor can purchase this protection on any or all of their portfolio.

Another investor can also do the exact opposite. Instead of purchasing protection, or hedging, an investor can increase their leverage and expose themselves to more of an asset then they could if they were to actually invest directly into the asset. This method can result in very large gains or losses and great care must be taken to ensure that the correct investment strategies are used.

There are numerous references available to research this area in great detail. Visit my references page for several useful links.