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.
A financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity, or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky.
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This glossary post was last updated: 22nd November, 2021 | 0 Views.