Investment, investing

Derivatives are securities (financial instruments) that are created by financial intermediaries synthetically, and are based on price or value of some primer assets or indicator. Usually such underlying assets are indexes, stocks, commodities, bonds. Also currency exchange rates, interest rates, various economical and other indices can be used for creation of derivative instrument. Changes in underlying asset price change a value of derivative.

Most popular derivatives are options and futures. The variety of standardized derivatives, which are traded on stock exchanges, is limited, but the choices of derivatives on OTC market are completely unbounded. The thing is, that the derivative can be any contract made on some factor that changes over time. For example, if my business depends on average temperature in some specific region, I would like to hedge fluctuations of temperature, all I need is to find someone who would create such instrument and sell it for me. 

To make a derivative contract at least two conditions are necessary: there must be an independent index that would be used for determination of derivative instrument value, and there must be a buyer and a seller of the contract that would agree on pricing and conditions. 

Derivatives can be used for hedging or for speculation. Read more about derivative investment.