Financial derivatives are contracts whose value is derived from the performance of an underlying asset, index, or rate. Common types of derivatives include options, futures, and swaps. They are often used for hedging risks or speculating on price movements in markets. These instruments allow investors to manage exposure to various financial risks, such as changes in interest rates or commodity prices. By using derivatives, traders can potentially enhance returns or protect their investments without directly owning the underlying assets. However, they can also involve significant risks if not managed properly.