Definition

1. Noun:
   • A financial instrument whose value is derived from the value of an underlying asset, index, or reference rate: A "derivative instrument" is a contract between two or more parties. Its price is determined by fluctuations in the value of the underlying entity, which can be an asset like a stock, bond, commodity, currency, or an index like the S&P 500.

Usage Examples

• Noun:
  • Options and futures are common types of derivative instruments.
  • The bank uses derivative instruments to hedge against interest rate risk.
  • The value of the derivative instrument fell sharply when the underlying stock price dropped.

Advanced Usage

• "to trade derivative instruments": to buy and sell these financial contracts.
  • Sophisticated investors often trade derivative instruments on specialized exchanges.
• "over-the-counter (OTC) derivative instrument": a derivative contract that is privately negotiated and traded directly between two parties, not on a formal exchange.
  • The two companies entered into an OTC derivative instrument to customize their risk exposure.

Variants and Related Words

• Derivative (n): A common shorter form for "derivative instrument."
  • The market for derivatives is vast and complex.
• Underlying (adj/n): Referring to the asset, index, or rate from which the derivative's value is derived.
  • The derivative's performance is tied to its underlying asset.

Synonyms

• Financial derivative: A direct synonym.
• Contingent claim: A term used in finance to describe instruments like options, whose payoff is contingent on a future event.

Related Phrases

• Derivatives market: The marketplace where derivative instruments are traded.
  • He works in the derivatives market.
• Derivatives trading: The activity of buying and selling derivative instruments.
  • Derivatives trading carries significant risk.

Related Idioms/Expressions

(Note: As a technical financial term, "derivative instrument" itself is not typically used in idiomatic expressions. However, related concepts are often expressed formally.) - "To hedge one's bets": This informal idiom relates to a primary use of derivatives, which is hedging (reducing risk). - The farmer used futures contracts to hedge his bets against a poor harvest. (This illustrates the purpose, though it doesn't use the exact term "derivative instrument.")

Noun

1. a financial instrument whose value is based on another security