Derivative
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
A contract whose value is derived from the price of an underlying asset.
Derivative in plain English
A derivative is a bet whose payoff depends on something else's price, rather than on the thing itself. You don't own the underlying asset (a stock, a barrel of oil, a currency) — you own a contract whose value rises or falls as that asset's price moves. Think of a gift card that's redeemable for however many movie tickets $50 will buy that day: the card is worth more when ticket prices drop and less when they rise, so its value is 'derived' from ticket prices without the card being a ticket. People use derivatives to protect themselves from price swings (insurance) or to speculate on where a price is headed.
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