[di-riv-uh-tiv] 
| 3. | something derived. |
| 4. | Also called derived form. Grammar. a form that has undergone derivation from another, as atomic from atom. |
| 5. | Chemistry. a substance or compound obtained from, or regarded as derived from, another substance or compound. |
| 6. | Also called differential quotient; especially British, differential coefficient. Mathematics. the limit of the ratio of the increment of a function to the increment of a variable in it, as the latter tends to 0; the instantaneous change of one quantity with respect to another, as velocity, which is the instantaneous change of distance with respect to time. Compare first derivative, second derivative. |
| 7. | a financial contract whose value derives from the value of underlying stocks, bonds, currencies, commodities, etc. |
| de·riv·a·tive (dĭ-rĭv'ə-tĭv) adj.
|
Derivative
In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by the fluctuations of the underlying asset. The most common underlying assets include: stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
Investopedia Commentary
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.
Related Links
Introduction To Weather Derivatives
Corporate Use of Derivatives for Hedging
Futures Fundamentals
Options Basics Tutorial
See also: Credit Derivative, Forward Contract, Futures, Hybrid Security, Option, Rho, Underlying
Also spelled: derivatives, derivitives, derivitive
derivative
derivative de·riv·a·tive (dĭ-rĭv'ə-tĭv)
n.
Something obtained or produced by modification of something else.
A chemical compound that may be produced from another compound of similar structure in one or more steps.