What are derivatives in the context of finance?

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Derivatives in finance are defined as contracts whose value is linked to the price of an underlying asset, such as stocks, bonds, commodities, or interest rates. This relationship means that the behavior of derivatives is directly influenced by the fluctuations and movements in the value of these underlying assets. For example, options and futures are common types of derivatives, where the payoff is based on the future price of the underlying asset. This connection allows investors to hedge against risks, speculate on price movements, or achieve various investment strategies depending on how they believe the underlying asset will perform.

The other choices do not accurately describe derivatives. Financial contracts that are independent of other assets do not fall under the category of derivatives, as the essence of derivatives is their dependence on underlying assets. Similarly, investment products consisting solely of equities pertain to stocks and do not encompass derivatives, which can involve a range of assets. Lastly, fundamental analysis deals with evaluating a security by examining related economic, financial, and other qualitative and quantitative factors, which is not directly related to derivatives. Overall, option C captures the essence and function of derivatives accurately in the context of finance.

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