What are "financial derivatives" primarily used for?

Financial derivatives are primarily used for hedging or speculative purposes because they are financial instruments whose value is derived from the performance of an underlying asset, index, or rate.

Hedging involves using derivatives to reduce risk associated with the price fluctuations of the underlying assets. For example, an investor holding a stock may purchase options to ensure that they can sell their stock at a predetermined price, thus protecting against potential losses if the stock’s value decreases.

On the other hand, derivatives can also be used speculatively, allowing investors to bet on the direction of market prices with the potential for significant gains. For instance, a trader might buy futures contracts anticipating that the price of a commodity will rise, thereby leveraging their position for greater profit.

While due diligence in asset acquisitions, long-term investment analysis, and company valuation processes are important aspects of finance, they do not capture the primary function of financial derivatives as fully as the use for hedging and speculation.