What is a Derivative?

A derivative is a financial contract between two parties that derives its value from an underlying asset. This means that they possess no value of their own, but are dependent on the asset to which they are linked.

The buyer enters into an agreement with the seller to purchase the asset on a specific date at a fixed price. 

In some cases, the seller does not necessarily have to own the asset but can give the necessary amount to the buyer to purchase it at the prevailing price. The seller can also give another derivative contract that balances the value of the previous one.

Derivatives are often used for stocks, bonds, currency, commodities, and interest rates.