Derivatives are financial instruments derived from underlying assets. By tradingor exchanging the underlying assets at the present, derivative traders agree toexchange cash or assets over time based on the underlying assets in the future.Major derivatives in financial markets are options and futures. Options are contractsthat give the owner the right, but not the obligation, to buy or sell an asset.Futures are contracts to buy or sell an asset on or before a future date at a pricespecified today. Derivatives, therefore, help entrepreneurs and investors to managetheir risks by reducing the risks concerning the price of the underlying asset to betransferred from one party to another, which is insured by a clearing house andcreates a transparency, fairness, and transferability. Information regarding trading inderivative markets reflects prices of underlying assets in the future, which helpinvestors to plan their investment effectively. The effectiveness of risk managementin investing in derivative markets is that traders can use derivatives to hedge ormitigate risk in the underlying assets by entering into a derivative contract thevalue of which moves in the opposite direction to its underlying position andcancels part or all of it out. There are three types of risk mitigation: 1) Fair valuehedge that allows entrepreneurs to recognize their profit and loss statement, 2)Cash flow hedge or Forecast transaction 3) Hedge of net investment in foreignentity that allows shareholders to recognize the effectiveness of the investment, aswell as the ineffectiveness of the profit and loss period.