Derivatives

Abstract

A derivative is a financial instrument whose payoff depends on the values of other more basic variables. The variables underlying derivatives are often the prices of traded securities. Derivatives separate market and credit risks from the underlying assets and liabilities, and offer the ability to reduce a risk exposure through its transfer to a party that is prepared to take on and manage those risks. Derivative securities are also known as contingent claims and can be contingent on almost any variable, from the price of a commodity to weather outcomes. There are two basic types of derivatives: futures/forwards and options.