COMMODITY

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Commodity

The term derivative refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. A derivative is set between two or more parties that can trade on an exchange or over-the-counter (OTC). These contracts can be used to trade any number of assets and carry their own risks. Prices for derivatives derive from fluctuations in the underlying asset. These financial securities are commonly used to access certain markets and may be traded to hedge against risk.

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Key Takeaways

  • Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark.
  • A derivative can trade on an exchange or over-the-counter.
  • Prices for derivatives derive from fluctuations in the underlying asset.
  • Derivatives are usually leveraged instruments, which increases their potential risks and rewards.
  • Common derivatives include futures contracts, forwards, options, and swaps.