what is a derivative in finance

In finance, a derivative is a contract between two or more parties that derives its value from the performance of an underlying entity, which can be an asset, index, or interest rate). Derivatives are one of the three main categories of financial instruments, along with equity (i.e., stocks or shares) and debt (i.e., bonds and mortgages) ). The value of a derivative is determined by fluctuations in the underlying asset. Derivatives can be traded on an exchange or over-the-counter, and they are usually leveraged instruments, which increases their potential risks and rewards. Common types of derivatives include futures contracts, forwards, options, and swaps. Derivatives are used for a variety of purposes, including risk management, hedging, arbitrage between markets, and speculation).