Accounting Dictionary

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Derivative

Definition: A derivative is a financial instrument whose value changes in relation to changes in a variable, such as an interest rate, commodity price, credit rating, or foreign exchange rate. It also requires either a small or no initial investment, and it is settled at a future date. It allows an entity to speculate on or hedge against future changes in market factors at minimal initial cost.

Examples of derivatives are call options, put options, forwards, futures, and swaps.

A nonfinancial instrument may also be a derivative, as long as it is subject to potential net settlement (not delivering or taking delivery of the underlying non-financial item) and it is not part of an entity's normal usage requirements.