A derivative is a security with a price that is dependent upon or derived from one or more
underlying assets. The derivative itself is a contract between two or more parties based
upon the asset or assets. Its value is determined by fluctuations in the underlying asset.
The most common underlying assets include stocks, bonds, commodities, currencies,
interest rates and market indexes.
Derivatives can either be traded over the counter (OTC) or on an exchange. OTC
derivatives constitute the greater proportion of derivatives in existence and are
unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives
generally have greater risk for the counterparty than do standardized derivatives.