For a fixed regular payment, insurers give their customers the right to collect potentially much larger sums if the events insured against fire, theft, sickness, or some other calamity occur. The insurer uses the premiums it collects to invest pro- ductively elsewhere in the economy, thus performing an intermediary function as well. Mutual funds also perform double duty. Stock index funds, for instance, now let an investor buy what amounts to a share of the entire stock market not an easy thing to do on one's own. Just as they intermediate between savers and investors, financial mar- kets also spread the costs of risk.
Derivatives come in many forms.
Two of the simplest, as well as the earliest, are options and futures contracts. Options give the buyer the right to buy or sell a commodity, and more recently a financial instru- ment, at a fixed price. Futures contracts perform similar price-locking functions. The common feature of both instruments is that they allow those who are worried about price movements to transfer their worry and their risk to someone else. More exotic forms of derivatives currency swaps, interest rate swaps, and so forth do the same thing, but for differ- ent types of risk.