Subject 1. Introduction

A derivative is a financial instrument that offers a return based on the return of some other underlying asset. In this sense, its return is derived from another instrument. A derivative contract has a limited life, with its payoff typically determined and/or made on the expiration date.

User Contributed Comments 5

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BunnyBaby: What is the difference between Forward Committment and Contingent Claims? As you break down the different methods of purchase why are some options available only through exchange and some OTC? Did you notice that only Options on futures and Exotic options and Asset back securities are available via one method only?
Shalva: The specifics are explained in following LOS-notes
johntan1979: Read on, Baby!
ldfrench: "Derivatives are financial weapons of mass destruction" - Warren Buffett in 2002.
ankurwa10: think of it this way. Forward "commitment" leaves you with no choice but to honour it. whereas contingent claim are dependant on something happening, thereby leaving an element of choice.

not scientific, but the reasoning helped me remember.