Derivative

How it is used

Used for futures, options, forwards and swaps. The asset a derivative is based on is called the underlying. Companies and funds use derivatives to hedge risks; traders also use them to speculate with leverage. Derivatives trade on exchanges or over the counter (OTC).

Example sentences

1. The exporter uses currency derivatives to protect itself against swings in the lira.

2. Derivatives can magnify losses quickly if they are used with high leverage.

Common collocations

• derivatives market
• currency derivatives
• use derivatives
• over-the-counter derivatives
• derivative contract

Related terms

• optionA contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a fixed price before or on a certain date, in exchange for a payment called the premium.
• futures contractA standard contract traded on an exchange that obliges the buyer and seller to trade an asset at a fixed price on a future date. Both sides must keep a margin deposit.
• hedgeTo reduce the risk of losing money on an investment or business exposure by taking an opposite position, often with derivatives such as futures or options.
• leverageThe use of borrowed money or financial products to control a larger investment than your own money would allow, which increases both possible gains and losses.

This word in other fields

The same English word can have a different meaning in another field:

• derivative · Mathematics
• derivative · Finance & Banking

More terms: Derivatives

• call option
• put option