Derivatives are an asset whose value is derived from the change in value of an underlying asset. The most familair type of derivatives for individual investors are options. Options for individual investors are typically short term derivatives based on the movement of a single stock or index. Longer term options, sometimes two years in length, are called LEAPS. These instruments are often traded on the Chicago Board of Options Exchange (CBOE), the largest exchange in the US for options.
However, a much more diverse mix of derivatives trades on private markets between investment banks and their clients. The dollar values of this market exclipses the options market by several hundredfold and the underlying instruments are often interest rates, credit ratings, currencies, bond prices and many other more esoteric securities.