Business, Legal & Accounting Glossary
A derivative is an agreement between between two or more parties which serves as a security whose value is based on price fluctuations of an underlying asset (stocks, bonds, commodities, etc.). Derivatives are a form of alternative investment and the most common forms include futures, options, and swaps.
A derivative, or derivative security, is an asset whose price is based on the value of an underlying asset. A derivative can come in several forms such as options, futures, and swaps. An option contract is a derivative that gives the owner the right, but not the obligation, to buy or sell the underlying at a predetermined price. A futures contract is a derivative that commits a party either to buy or sell the underlying in the future at a certain price. A swap agreement is a derivate that commits the counterparties to exchange cash flows according to a pre-arranged formula. For example, an interest rate swap will specify cash flows to be paid as a function of some interest rate. The term derivative is generic and variations, as well as entirely different derivative types, are possible.
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This glossary post was last updated: 26th April, 2020 | 9 Views.