Derivative

A derivative is a financial instrument whose value is derived from the performance of an underlying asset, index, or rate. Common underlying assets include stocks, bonds, commodities, currencies, and interest rates. Derivatives are used for various purposes, such as hedging risk, speculating on price movements, or leveraging positions to amplify potential returns. Derivatives can be traded on exchanges or over-the-counter (OTC), and they carry a high level of risk due to their leverage and complexity.

Example

A wheat farmer might use a futures contract (a type of derivative) to lock in a price for selling their wheat at a future date, hedging against price fluctuations.