Derivative instruments

A derivative is a financial instrument whose value depends on underlying variables. The most common derivatives are futures, options, and swaps but may also include other tradable assets such as a stock or commodity. A derivative is essentially a contract whose payoff depends on the behavior of a benchmark.

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile.

Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.