Derivative

A derivative is a contract between two parties, which derives its value from an underlying asset. It gives certain rights and obligations to both the parties and has either linear or skewed payoffs. Underlying assets include shares, bonds, foreign exchange, gold, silver, energy resources etc. Derivatives can either be traded over-the-counter or on an exchange. Derivatives, in the modern era, are used for hedging the risk, to create an ability to derive value from contingent events, to provide leverage, and to speculate to earn profits.  Futures, Forwards, Options, and Swaps are some of the common forms of derivatives.