In finance, a derivative is understood as being an instrument on which its value ends up depending on the values of other more basic underlying assets/variables. It’s also common to see people in this area referring to derivatives as simple contingent claims.
Example of derivatives:
– Futures and forwards contracts (implies an obligation to buy or sell)
– SWAPs (Exchange of cash-flows)
– Options (Grants the right to either buy or sell)
The reason why so many people invest on financial instruments such as the derivatives mentioned above, is precisely because they allow us to hedge the risk.
– Return to the Financial Dictionary –