A derivative can be defined as a financial security with its worth that is dependent upon or derived from, a security or group of securities i.e. a benchmark index.
The derivative itself is a agreement between at least two people or organizations, and the derivative derives its value via the disturbance in the price of the security.
The most widely recognized underlying assets for derivatives are stocks, bonds, and market indices etc. These securities are commonly bought through brokerages.
Derivatives can be exchanged over the counter (OTC) or on a stock market exchange.
Over the counter derivatives have a higher proportion of the derivatives market.
Over the counter exchanged derivatives, by and large have a more possibility of counter party risk.
Counter party risk is described as the risk that one of the people associated with the exchange might default.
These exchange of derivatives are unregulated and take place privately in between the parties.
On the other hand, derivatives that are traded on an exchange are institutionalized and more intensely managed.
Derivatives can be utilized to support a position, speculate on the directional movement of a security, or provide leverage to current holdings.
Their value originates from the changes in the values of the security.
Initially, derivatives were utilized in order to maintain balanced exchange rates for goods exchanged internationally.