Derivative

Filed Under » , , , ,
Dictionary Says

Definition of 'Derivative'

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. 
Investopedia Says

Investopedia explains 'Derivative'

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.

Related Definitions

  •

    Credit Derivative

    Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options ...
    Read More »

  • Forward Contract

    A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on ...
    Read More »

  • Economic Derivative

    A relatively new form of derivative contract (the first ones were traded in 2002) that is based on the future value of some national economic indicator, such as non-farm payrolls, the ...
    Read More »

    • Hybrid Security

      A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible ...
      Read More »

    • Derivatives Time Bomb

      A possibile situation where the financial markets plunge into chaos if the massive derivatives positions owned by hedge funds and the large banks were to move against those ...
      Read More »

    • Exchange Traded Products – ETP

      A type of security that is derivatively-priced and which trades intra-day on a national securities exchange. Exchange Traded Products are derivatively-priced, where the value is derived ...
      Read More »

    • Hedgelet

      A simplified derivative instrument that allows investors to hedge or speculate on economic events such as housing prices, commodity prices, interest rates, currencies and economic ...
      Read More »

    • Longevity Derivatives

      A class of securities that provides a hedge against parties that are exposed to longevity risks through their businesses, such as pension plan managers and insurers. These types of ...
      Read More »

    • Breaking The Buck

      When the net asset value (NAV) of a money market fund falls below $1. Breaking the buck can happen when the money market fund's investment income does not cover operating expenses or ...
      Read More »

    • Wasting Asset

      An item that irreversibly declines in value, as a function of time. Wasting assets include vehicles, machinery and other fixed assets. Accountants attempt to quantify the amount that ...
      Read More »

Articles Of Interest

Sponsored links
Hot Definitions
Partner Links
Suggested Definitions