Derivatives are a type of financial instrument that derive their value or performance from the value of an underlying asset, such as a stock, bond, commodity, currency, or market index. Common types of derivatives include futures, options, swaps, and forwards. They are widely used in finance for hedging risk (e.g., to protect against currency or market volatility), for speculating on future price movements, or for leveraging investments.

For example, a futures contract might allow an investor to agree to buy a commodity, such as oil, in three months at a fixed price, which can help manage price uncertainty. An option gives a right (but not an obligation) to buy or sell the underlying asset at a specific price before the expiration date of the contract. Derivatives are traded on exchanges or over-the-counter, each with its own risks and benefits.

Understanding derivatives is essential for managing financial risks and for financial planning within an organization. It is also important to account for derivatives appropriately in financial reporting, as their values can fluctuate significantly.