Derivative
dih-RIV-uh-tiv
/dɪˈrɪvətɪv/
A financial contract whose value is derived from an underlying asset, group of assets, or benchmark.
Derivatives are complex financial instruments used for hedging, speculation, or arbitrage, and do not represent direct ownership of the underlying asset.
The story behind the word. The word 'derivative' comes from the Latin 'derivare', meaning 'to draw off, to lead or draw from water'. It's formed from 'de-' (from) and 'rivus' (stream). This imagery of drawing from a source perfectly captures the financial meaning: a derivative's value is 'drawn off' or originates from an underlying asset, much like a small stream draws water from a larger river.
Word relationships
- Option: A specific type of derivative that gives the holder the right, but not the obligation, to buy or sell an asset.
- Future: A specific type of derivative that obligates the holder to buy or sell an asset at a predetermined price on a future date.
- Underlying asset: The asset from which a derivative's value is derived, rather than the derivative itself.
Commonly confused with
- Share: A 'derivative' is a contract based on an asset's value, not direct ownership like a 'share'.
Word family
- Derive (verb): To obtain something from a specified source.
- Derivation (noun): The process of deriving something.
Collocations
- financial derivative
- credit derivative
- commodity derivative
- derivative market
Example sentences
- "Companies often use derivatives to hedge against currency fluctuations or commodity price changes." Risk management
- "Futures and options are common types of derivatives traded on specialized exchanges." Financial markets
- "The complexity of certain derivatives contributed to the 2008 financial crisis, prompting calls for stricter regulation." Regulatory concerns
Memory hook
A 'derivative' is 'derived' from something else – its value comes from an underlying asset. Derived value
When not to use
Do not use 'derivative' to refer to direct ownership (use 'share') or a simple loan (use 'bond').
Fun facts
- The earliest forms of derivatives can be traced back to ancient civilizations, with contracts for future delivery of crops in Mesopotamia and rice futures in 17th-century Japan.
Related words
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