Derivative (finance)

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In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: an item (the "underlier") that can or must be bought or sold, a future act which must occur (such as a sale or purchase of the underlier), a price at which the future transaction must take place, and a future date by which the act (such as a purchase or sale) must take place. A derivative's value depends on the performance of the underlier, which can be a commodity (for example, corn or oil), a financial instrument (e.g. a stock or a bond), a price index, a currency, or an interest rate. Derivatives can be used to insure against price movements (hedging), increase exposure to price movements for speculation, or get access to otherwise hard-to-trade assets or markets. Most derivatives are price guarantees. Some derivatives are based on the occurrence of specific events or measurable outcomes rather...

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