Economic Derivatives Explained

Economic derivatives are fairly new to the market as of 2002. They are contracts based on an underlying asset that is actually an economic indicator, not an asset at all. For example, an economic derivative's value may be based on the gross domestic product (GDP) over a period, the retail sales level or the jobless rate. By betting on these figures, investors who trade derivatives can turn a profit without ever exchanging a security. As long as the investor can find a party willing to make an opposite bet, he or she can enter into a contract derived from an economic indicator.

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