• Entry
  • Reader's guide
  • Entries A-Z
  • Subject index

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 ...

    • Loading...
    locked icon

    Sign in to access this content

    Get a 30 day FREE TRIAL

    • Watch videos from a variety of sources bringing classroom topics to life
    • Read modern, diverse business cases
    • Explore hundreds of books and reference titles