Derivative
Definition
A financial contract whose value is derived from an underlying asset, index, rate, or other financial instrument.
Explanation
Derivatives include options, futures, forwards, and swaps. They serve three purposes: hedging (reducing risk), speculation (leveraged directional bets), and arbitrage (exploiting price discrepancies). The global derivatives market is enormous — notional value exceeds $600 trillion, though the actual risk is a fraction of that amount. Warren Buffett famously called derivatives 'financial weapons of mass destruction,' but they are essential tools for risk management when used prudently.