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Derivatives

dih-RIV-uh-tivz /dɪˈrɪvətɪvz/

nounC2GMATGRE

formalbusinessfinance

Financial instruments whose value is derived from the value of an underlying asset (such as a stock, bond, commodity, or currency), a rate (such as an interest rate or exchange rate), or an index.

These are complex financial contracts used for hedging, speculation, or increasing leverage. Their value is not intrinsic but 'derived' from something else.

The story behind the word. The word 'derivatives' comes from the Latin derivare, meaning 'to draw off, lead off,' from de- ('from') and rivus ('stream'). It originally referred to something 'drawn from' another source. In mathematics, a 'derivative' is a function derived from another function. The financial sense, referring to instruments whose value is 'derived' from an underlying asset, emerged in the late 20th century as these complex financial products became more common.

Word relationships

Financial contracts: A broader term; 'derivatives' specifies that their value is derived from an underlying asset.
Futures: A specific type of derivative contract.
Options: Another specific type of derivative contract.

Underlying assets: The primary assets from which derivatives derive their value (e.g., stocks, bonds).

Commonly confused with

Stocks/Bonds: Stocks and bonds are underlying assets. Derivatives are contracts based on the value of these assets, not the assets themselves.

Word family

Derive (verb): To obtain something from (a specified source).
Derived (adjective): Obtained or developed from something else.

Collocations

financial derivatives
credit derivatives
commodity derivatives
equity derivatives
over-the-counter derivatives

Example sentences

"Options and futures contracts are common types of derivatives used by investors to hedge or speculate." Financial markets
"Companies often use derivatives to manage their exposure to fluctuations in currency exchange rates or commodity prices." Risk management
"The complex nature of certain derivatives, particularly mortgage-backed securities, played a significant role in the 2008 financial crisis." Economic crisis

Memory hook

DERIVATIVES get their VALUE from something else, they are 'DERIVED' from an underlying asset, like a river DERIVES its water from a mountain spring. Derived from a source.

When not to use

Do not use 'derivatives' to refer to primary assets like stocks, bonds, or cash. It specifically refers to contracts whose value is dependent on these underlying assets.

Fun facts

The global market for derivatives is estimated to be in the hundreds of trillions of dollars, far exceeding the value of the underlying assets.

Related words

Hedge, Speculate, Exposure

Explore more words

Derivative, Hedging, Commodities, leverage, Bond, Depreciation