What is a derivative security?
A derivative security, also known as a derivative stock, is a financial instrument whose price is dependent on one or a number of underlying financial assets. In itself, the derivative security is no more than an agreement between two contracted parties to buy or sell an asset at a fixed price on or before a date of expiration. The value of the security is dictated by the value of the underlying asset, which is usually a stock, a commodity, a bond, currency, interest rates or markets indexes. Derivative securities usually are valued by using a version of the Black-Scholes Option Pricing Model. A derivative security is particularly appealing to those investors looking to offset or hedge their risk when investing, but a number of other financial players also take an interest in stock derivatives from a range of motives. Among these other players stand most prominently the speculators and arbitrators who are less interested in off-setting or hedging risk and are instead motivated by the p
