In finance, a
derivative is a contract that
derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and often called the "
underlying". Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include
forwards,
futures,
options,
swaps, and variations of these such as synthetic
collateralized debt obligations and
credit default swaps. Most derivatives are traded
over-the-counter (off-exchange) or on an exchange such as the
Bombay Stock Exchange, while most
insurance contracts have developed into a separate industry. Derivatives are one of the three main categories of financial instruments, the other two being
stocks (i.e., equities or shares) and
debt (i.e.,
bonds and mortgages).