It is a financial contract whose payoff structure is determined by the value of an underlying commodity, security, interest rate, share price, exchange rate, oil prices and the like. So we can say that a derivative instrument derives its value from some underlying variable. Thus, a derivative instrument by itself does not constitute ownership, but it is a promise to transfer ownership.

      Derivatives are specialized contracts which are employed for a variety of purposes. These include reduction of funding costs by borrowers, increasing the yield on assets, modifying the payment structure of assets to correspond to the investor’s market view, etc. But the most important use of derivative is in transferring the market risk, called hedging which is a protection against losses resulting from unforeseen price or volatility changes. So, derivatives are very important instrument of risk management. The reason behind growth of derivatives market is its usefulness as a risk management tool. Derivatives have assumed a very significant place in the field of finance and they seem to be driving global financial markets.