Derivatives refer to anything in the financial market in which the value of the subject is dependent on another asset.

More simply, it is an item that derives its value from another subject.

The most common derivative within the industry is that associated with an ‘option’. Companies may use forward options to guarantee a price of a commodity such as oil in order to receive a fixed price and avoid price fluctuations. For this type of a derivative, a company would pay a premium but expects to be protected from price fluctuations.

Swaps, forward and futures are common types of derivatives.