What's a derivative?

[zwiiyt]

I keep hearing the word derivative on news shows and i see it in the paper. When i read about it, i get the impression that it's just a contract between two parties about when they will sell and at what price. So it's like a futures trade? Am i missing something here?

 

[sails]

I keep hearing the word derivative on news shows and i see it in the paper. When i read about it, i get the impression that it's just a contract between two parties about when they will sell and at what price. So it's like a futures trade? Am i missing something here?

Have a look at this link from Investopedia to give you the answers. What you are missing is that the price of the derivative is also based on it's underlying: http://www.investopedia.com/terms/d/derivative.asp