Financial Derivatives are instruments whose payoffs largely depend on more fundamental or primitive good. These are contractual relationship between parties in which payoffs are derived from agreed benchmarks. Financial derivatives are not complete without the underlying products or commodities.

In other words, financial derivatives are financial instruments whose payoffs are dependent upon other financial instruments underlying the transactions. These financial instruments can be anything from securities and currencies to indices.

Some of the benefits that buyers of financial derivatives enjoy mainly include risk management and trade efficiency.
Risk Management
This benefit is not related to the elimination of risks but is more about management of the investment risks involved. Financial derivatives prove to be powerful tools for limiting the risks which organizations and individuals have to face in ordinary conduction of the businesses.

Managing the risks successfully with financial derivatives require you to understand fully the principles which govern the pricing and costs of these derivatives. Such trading activities require deep understanding and skillful execution of transactions. When used properly, you will be surprised to note how financial derivatives are able to save your costs and increase your returns.

Trading Efficiency
As financial derivatives allow for free trading of the individual risk components, they help in improving the market efficiency. As a trader, you can use positions in one or more derivatives as substitutes for positions in the underlying financial instruments.

In a number of instances, you will find the financial derivatives to be much more attractive instruments than underlying security factors. This is mainly because the financial derivatives offer greater liquidity in the market and the transaction costs related to trading financial derivatives is much less than trading underlying instruments.

Positive impact on the Economic system
Financial derivatives also facilitate the selling and buying of risk, and this is considered to have a great positive impact on the current economic system. Although people lose and gain money through derivatives, it does not adversely affect the economy of a country, which is a good thing to happen. Former chairman of the Federal Reserve Board, Alan Greenspan, said that the use of financial derivatives helps in softening the impact of economic downturn to a great extent.

Financial derivatives are used by the investors for speculating and making profits, if the value of underlying assets moves in the desired way. Alternatively, the traders can also use these derivatives for hedging or mitigating the risks in the underlying assets, by entering into derivative contracts whose value has not moved in the expected direction. Therefore, you can invest in the market of derivatives and see your finances increasing.