A derivative is a financial instrument, merely as an agreement between two people/parties that has a value determined by the future price of something else. Derivatives can be thought of as bets on the price of something. Derivatives can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Investors using Derivatives for the followings :

• provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
• speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)
• hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
• obtain exposure to underlying where it is not possible to trade in the underlying (e.g. weather derivatives)
• create optionability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)