Derivatives

A derivative is a financial instrument which derives its value from the value of another underlying asset, such as an index, stock, commodity, currency, energy or interest rate—it has no intrinsic value in itself. Derivative transactions include a variety of financial contracts, including swaps, futures, call and put options, collars, forwards, and various combinations of these.

In practice, derivatives are a contract between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties. The most common underlying assets include commodities, stocks, bonds, interest rates and currencies.

There are two groups of derivative contracts:  the privately traded over-the-counter (OTC) derivatives such as swaps and options that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges.

Derivatives can be used either for risk management (i.e. to "hedge" by providing offsetting compensation in case of an undesired event, a kind of "insurance") or for speculation.