(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.