Derivative

What is Derivative?

Derivative meaning A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e. derived from) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps. For example, futures contracts with cash settlement are derivatives of the price of a commodity or the value of an index and options on futures are derivatives of futures contracts.

 

reference: U.S. COMMODITY FUTURES TRADING COMMISSION – CFTC Glossary