Definition of derivative securities 126
A derivative is a contract to bu
y or sell something in the future,
namely the underlying.
All contract details
(such as the price, the quantity to be bought or
sold, the maturity, etc.)
are fixed at the time you enter the
contract.
The price of the derivative
depends on the underlying.
The underlying can be everything as
long as it is clearly defined!
Examples:
Financial prices: stocks, bonds, stock-indices, exchange rates
Commodities: oil price, gold, copper, coffee, orange juice concentrate, wine, energy, weather
In most cases the underlying is the price of a traded asset!
Derivative securities: Introduction