It is a financial instrument, traded on or off an exchange, the price of which is directly “derived” from the value of one or more underlying instruments, e.g., debt instruments, commodities, or any agreed upon pricing index. Derivatives do not directly transfer property, and the derivative itself is merely a contract between two or more parties with a value that is determined by fluctuations in the underlying asset. They can be used to hedge risk or to lock in a fixed rate or return. Derivatives are generally used to hedge risks, but can also be used for speculative purposes.
