In financial derivatives terminology, the term Derivatives refers to a financial instrument that has its value determined by or derived from the value of one or a set of underlying assets. Derivatives usually take the form of contractual agreements between the parties in which they agree to perform according to the value of the underlying asset at some specified future time.
The assets on which the value of Derivatives might depend can include stocks, bonds, currencies, indexes, interest rates and commodities, among numerous others. The primary types of Derivatives include such financial instruments as options, swaps, forwards and futures. Derivatives can provide an opportunity for an investor to adjust the risk profile of their investment portfolio. They can do this either by adding risk or by reducing risk through hedging existing or expected future assets with Derivatives. Corporation can also use Derivatives to reduce or hedge the risk arising from projected future cash flows so they can focus on their primary business objectives.