In finance, derivatives or derivative financial instruments are securities whose price depends on or is attributable to one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlyings are equities, bonds, commodities, currencies, interest rates and market indices.
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are simply contracts, almost anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are usually used to hedge risk, but can also be used for speculative purposes. For example, a European investor buying shares in an American company from an American stock exchange (and using US dollars for the purpose) would be exposed to exchange rate risk while holding those shares. To hedge this risk, the investor could buy currency options to secure a fixed exchange rate for future share sales and currency conversion back into CHF.