A financial derivative refers to any financial security whose value is derived from or determined by the value of another asset. The asset from which a derivative gets its value is known as the underlying asset. Common underlying assets for derivatives are stocks, bonds, interest rates, commodities, currencies and market indexes. The values of these underlying assets change according to the market conditions.
People enter into derivative contacts to earn profits by speculating on the value of the underlying asset in the future. By entering a derivative contract you either make gains by placing accurate bets or protect yourself from situations where you face losses in the market where the stocks are being traded. Investors also enter derivative contracts to buy commodities at a lower price at one market and sell them at a higher price in another market.