A derivative is a financial contract whose value depends on an underlying asset. That asset can be a stock, a bond, a commodity, a currency, or an index. The derivative itself has no intrinsic value. Its worth comes from what it references. Derivatives are used to hedge risk or to speculate on price movements.

Types vary. Futures contracts obligate the buyer to purchase an asset at a set price on a set date. Options give the buyer the right, but not the obligation, to buy or sell. Swaps exchange cash flows between parties. Forwards are customized contracts traded over the counter. Each type serves a different purpose and carries different risks.

Derivatives are powerful and dangerous. They let farmers lock in crop prices and airlines hedge fuel costs. They also let traders take enormous leveraged positions. The 2008 financial crisis was amplified by complex mortgage derivatives that few understood. Warren Buffett called them "financial weapons of mass destruction." Regulators now require more transparency and central clearing for many contracts. The market remains vast, with notional values in the hundreds of trillions of dollars.

Common types

• Futures
• Options
• Swaps
• Forwards
• Credit derivatives