A complex term used often but rarely explained, a derivative is a financial contract that is valued in relation to another asset (i.e. it derives its value from elsewhere).
The contract usually takes place between an investment or commercial bank and a customer under specific conditions (including dates, underlying variables – such as commodities, stocks and bonds – and so on). Payments are then exchanged between the two parties.
Derivatives are generally used as a risk management tool (to ‘hedge’ against a certain event) or speculation (to bet on a particular event). They are defined broadly as an ‘option’ product.