Financial Derivatives

A financial derivative is a financial instrument whose value and profits depend on the value of some more basic underlying financial instrument. For example, a stock option is a financial derivative because the value and payoffs of a stock option depend on the value and price movements of the underlying stock. Similarly, an interest rate futures contract is a financial derivative because the value and payoffs of the futures contract depend on the value of an underlying debt instrument, such as a bank deposit or a bond. As a final example, a foreign currency forward contract is a financial derivative because its value and payoffs depend on the value of the underlying currency.

Strictly speaking, a financial derivative is a derivative that is built on an ...