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What is a Derivative?

Derivative is a product whose value is derived from the value of one or more

basic variables, called underlying. The underlying asset can be equity, index,

foreign exchange (forex), commodity or any other asset.

Derivative products initially emerged as hedging devices against fluctuations

in commodity prices and commodity-linked derivatives remained the sole

form of such products for almost three hundred years. The financial

derivatives came into spotlight in post-1970 period due to growing instability

in the financial markets. However, since their emergence, these products

have become very popular and by 1990s, they accounted for about twothirds

of total transactions in derivative products.