Derivative definition
/What is a Derivative?
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 requires either a small or no initial investment, and is settled at a future date. A derivative allows an entity to speculate on or hedge against future changes in market factors at minimal initial cost. Derivatives may be traded over the counter or on a formal exchange.
A non-financial 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.
Examples of Derivatives
Examples of derivatives are call options, put options, forwards, futures, and swaps.