Derivatives are assets that derive their value from an underlying asset, such as stocks, bonds, currencies, commodities, indices, and other derivatives.
A simple way to view derivative contracts are as time-dependent wagers on volatilities of underlying assets. These wagers divide and reassemble capital beyond the conventional ways a production-based product can enclose itself.
Compared to an economy of commodity production where parties seek to shelter themselves from foreign competition, a derivative-based economy runs on the constant breach of itself to sustain its own existence. Furthermore, the process of their wealth creation differs greatly; while commodities yield wealth through the power of labor’s value attribution between the time of investment and divestment, in the world of derivatives, wealth is formed as a consequence of volatility. Without the production of volatility, derivatives are meaningless, and when volatility can engender volatility, derivatives as a measure can abolish any physical limitations to induce volatility in its underlier and amplify its own spread.
Attachment of the future to the present leads to an expansion of the now, that in turn, destabilizes the present, which is why derivative pricing models seek to scientify the uncertain through deterministic probability distributions. (As of 11/06/23, I’d like to elaborate more on this point. Will likely edit later, with a new section on deeper applied probability to options pricing. It’s difficult to walk through Brownian Motion, Martingales, etc. in the high-level way this page is set up. Convexity is also super important. This page is only for understanding what options are, not how to price them like an OMM — 11/14/2023, creating new page to explain volatility as a concept beyond what is below here.)
In today's contemporary market, characterized by a prevailing culture of speculation, particularly evident post-global financial crisis and accentuated by a surge in opportunities for the average consumer in 2021, it is crucial for finance students to recognize that the traditional roles of commodity-producing labor and services have been significantly overshadowed by the manipulation of assets. Derivatives play a strong role in this through their procedural disassembly of capital: into its liquidity, domestic monetary value (inflation), foreign monetary value, reliability of repayment (counterparty default in credit transactions), organization of ownership, and price stability (volatility).This shift is underscored by the fact that returns on assets now surpass those generated through productive labor.