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Derivative

A derivative is an investment that gets its value from something else – an oil derivative derives its value from the price of oil. For example, we could agree that I will sell you a barrel of oil on September 30th, 2025 at whatever the price of oil is then. Our deal is worth a certain amount right now – even though it won’t be completed until September 30th, 2025 – and its worth is determined (i.e. its value is derived) from the oil price. I could sell our agreement, perhaps, to another investor who’d buy it today for a certain amount (in which case I’d be trading β€œoil futures”). Derivatives exist on all sorts of things: stocks, bonds, the value of currencies and commodities.

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