Derivatives

Definition

• Financial contracts whose value is derived from the value of some underlying asset, rate or index. Derivatives are used as risk-management tools by governments and corporations to reduce exposure to risk, mainly related to fluctuations in foreign-exchange and interest rates. Derivative instruments include swaps, options, futures and forward contracts and are used by banks in two principal activities: sales/trading and asset/liability management.

Synonyms
based off, spin-off, offshoot, outgrowth, by-product

Related Terms and Acronyms

• Foreign Currency (FCY) — Acronym,
  • Paper money and coins from other countries.
• Foreign Exchange (F/X, FX, FOREX, FE) — Acronym,
  • Various instruments used to settle payments for transactions between individuals or organizations using different currencies (e.g., notes, cheques, etc.).
  ➥ Bank account transaction code.
• Foreign Exchange Rate (FXRate) — Abbreviation,
  • The value of a nation's currency in terms of another nation's currency
• Futures — Definition,
  • Contracts to buy something in the future at a price agreed upon in advance. They first developed in the agriculture commodity markets but often involve foreign exchange, Eurodollar deposits and government bonds.
• Index — Definition,
  • A table of yields or interest rates being paid on debt (such as Treasury notes or bank deposits) that is used to determine interest-rate changes.
• Indexed Annuity — Definition,
  • An annuity where investment performance is pegged to a stock index.
• Investment — Definition,
  • Something you put your money into in order to make money.
• Issuer — Definition,
  • A legal entity that develops, registers, and sells securities including stocks, bonds and derivatives.
• Portfolio — Definition,
  • A collection of investments.
• Risk Management — Definition,
  • The methods used to identify, assess, and prioritize risk and the strategies used to manage them in the most effective and economical way possible.
• Secondary Market — Definition,
  • A market where financial instruments such as stocks, bonds, options and futures are bought and sold to investors.
• Securities/Investment Dealer — Definition,
  • One who acts as the agent for another party to buy and sell securities and other investments; also an underwriter.
• Security — Definition,
  • Property designated as collateral.
  • A document stating ownership of a stock or bond.
  • A tradable financial implement that represents ownership, the rights to ownership or debt.
• Swap — Definition,
  • An agreement between two businesses to exchange commodities, payments or other financial products to reduce the risk of volatile market conditions or to obtain a better price or rate. For example, interest rate swaps, where floating rate interest is exchanged for fixed rate interest, protects a corporation against rises in rates or allows it to take advantage of a better rate. A cross-currency swap enables two parties to enter into an agreement in which one exchanges its currency for the other's to meet their separate requirements.