1. Leverage:
The ability and chances to make huge and extreme profits
is high in derivatives than incase of primary securities or
mutual funds.
2. Manages the risk:

Derivative contracts helps to hedge the risk of high prices
in the future. Most important purpose of these contracts is
managing the risk.
Disadvantages of Derivatives:

1. High volatility:
Since the value of derivatives is based on certain
underlying things such as commodities, metals and stocks
etc., they are exposed to high risk. Most of the derivatives
are traded on open market. And the prices of these
commodities metals and stocks will be continuously
changing in nature. So the risk that one may lose their
value is very high.
2. Requires expertise:
In case of mutual funds or shares one can manage with
even a limited knowledge pertaining to his sector of
trading. But in case of derivatives it is very difficult to
sustain in the market without expert knowledge in the field.
3. Contract life:
The main problem with the derivative contracts is their
limited life. As the time passes the value of the derivatives
will decline and so on. So one may even have chances of
losing completely within that agreed time frame.

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