The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.
The derivative itself can be used as an underlying asset to speculate on price change, just like a stock or bond or etf. Yes, most derivatives were designed to be used as a hedge, or for producers of commodities to sell their products forward. But the fact is, most derivatives are used for speculation; a pure play on price change of the derivative itself. They are traded just like a stock, but they are usually leveraged. So a derivative allows the smaller investor to speculate on the underlying with less money and more bang for the buck. But leverage is a double-edged sword with high risk, in addition to potentially high gains. With leverage, you can lose more than you invest.
When used for speculation, derivatives are NOT a "risk transfer instrument," but rather a risk additive.
There are two sides to every trade. There are also two sides to every derivative trade. A speculator and a hedger. You are referring to hedging (transferring risk). Speculators use derivatives to seek profit. Without both a market would not exist.
Why do people trade with them, with anticipation of gain?
