The UCITS rules allow investment funds to invest in what are termed “derivatives”. These financial instruments, which include futures and options, are derived from other underlying assets, such as shares or bonds. The UCITS rules allow funds to employ derivatives either to reduce risk or to enhance returns. Their use is, however, strictly regulated and must also follow the investment policy set out in the fund’s prospectus. Many UCITS funds use derivatives as a defensive technique to preserve the value of their assets against market movements such as foreign exchange fluctuations.