A derivative is a contract between two or more parties whose value is based on an agreedupon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.
Futures contracts, forward contracts, options, swaps and warrants are common derivatives. A futures contract, for example, is a derivative because its value is affected by the performance of the underlying contract. Similarly, a stock option is a derivative because its value is "derived" from that of the underlying stock.
Derivatives are used for speculating and hedging purposes. Speculators seek to profit from changing prices in the underlying asset, index or security. For example, a trader may attempt to profit from an anticipated drop in an index's price by selling (or going "short") the related futures contract. Derivatives used as a hedge allow the risks associated with the underlying asset's price to be transferred between the parties involved in the contract.
For example, commodity derivatives are used by farmers and millers to provide a degree of "insurance." The farmer enters the contract to lock in an acceptable price for the commodity; the miller enters the contract to lock in a guaranteed supply of the commodity. Although both the farmer and the miller have reduced risk by hedging, both remain exposed to the risks that prices will change. For example, while the farmer locks in a specified price for the commodity, prices could rise (due to, for instance, reduced supply because of weatherrelated events) and the farmer will end up losing any additional income that could have been earned. Likewise, prices for the commodity could drop and the miller will have to pay more for the commodity than he otherwise would have.
Some derivatives are traded on national securities exchanges and are regulated by the U.S. Securities and Exchange Commission (SEC). Other derivatives are traded overthecounter (OTC); these derivatives represent individually negotiated agreement between parties.

What expiry months are typically available for derivatives?
Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >> 
What is the difference between derivatives and options?
Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ... Read Answer >> 
How is the price of a derivative determined?
Learn how different types of derivatives are priced, including how futures contracts are valued and the BlackScholes option ... Read Answer >> 
What does the underlying of a derivative refer to?
Find out more about derivative securities, what an underlying asset is and what the underlying assets refer to in stock options ... Read Answer >> 
What kinds of derivatives are types of forward commitments?
Learn more about what a derivative is, what a forward commitment is and which types of derivative securities have forward ... Read Answer >> 
What does it mean to roll a derivative contract?
Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>

Options & Futures
Derivatives 101
A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the assetâ€™s price movement with another party. 
Investing
What Is A Derivative?
A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies. 
Options & Futures
Futures, Derivatives and Liquidity: More or Less Risky?
Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk. 
Investing Basics
Warrants
Learn more about this derivative security. 
Options & Futures
Examples Of ExchangeTraded Derivatives
We look at some of the most common exchangetraded derivatives. 
Options & Futures
Why Forward Contracts Are The Foundation Of All Derivatives
This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ... 
Options & Futures
Was Buffet Right about Derivatives as WMDs?
Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful? 
Options & Futures
4 Equity Derivatives And How They Work
Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself. 
Products and Investments
SEC Derivatives Rule May Limit Diversification
The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify. 
Options & Futures
5 Equity Derivatives And How They Work
These derivatives allow investors to transfer risk, but there are many choices and factors that investors must weigh before buying in.

Derivative
A security with a price that is dependent upon or derived from ... 
Underlying Asset
A term used in derivatives trading, such as with options. A derivative ... 
Exchange Traded Derivative
A financial instrument whose value is based on the value of another ... 
Underlying Option Security
An underlying option security is the financial instrument on ... 
Underlying Security
The security on which a derivative derives its value. For example, ... 
Derivative Product Company  DPC
A specialpurpose entity created to be a counterparty to financial ...