Derivative (finance)

In finance, a derivative is a special type of contract. In it, the two parties agree to sell (or to buy) certain goods, at a given price, on a given date. Derivatives can be used in two ways. The first is called speculation: One party hopes that the market price differs from the price agreed upon in the contract, so that they can make the difference between the two. The second is called hedging: One party wants to make sure that the market price doesn't go in a direction that would hurt their profits, so they make sure that the price is agreed upon a long time before the transaction takes place. For a seller, hedging means that they can be certain to receive the agreed upon price, and for the buyer, hedging means that they can be certain not to pay more than the agreed upon price. From a moral point of view, speculation is considered a negative activity.

One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.

Derivatives can take many forms, but some of the most common types are Futures, Contracts for Difference and Options. They can also be structured on a range of different assets including Forex, Equities, Commodities, and interest rates.