(FINANCE) a financial instrument whose value is tied to
something else; for example,
* a futures contract (future)
* an option
* a swap
In each of these examples, the value of the derivative is related in some way to the price of
something else. When the market price of (say) an ounce of gold goes from $1000/oz to $1050/oz, the return to the owner of 1 oz. of actual gold is 5%. But for the owner of a call option or a future, the return is much, much greater than that.
A derivative can be used to multiply risk AND potential profits to speculators; but it can be used for the
counterparty to minimize risk by locking in prices, or by hedging against risk.