What Is A Derivative?

A derivative is a financial product whose value is derived from another asset (also known as the underlying asset). Derivatives are frequently used for speculation and hedging of risk and the most common forms of derivatives are:

  • Futures
  • Options
  • Swaps

The derivatives market is vast and extremely liquid, but also very hard to quantify as many are sold OTC (Over-the-Counter) and therefore not regulated. It is estimated that in late 2011 the derivatives market may be worth over $700 trillion, compared to a global GDP of ~$60 trillion.

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