(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.