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What is a derivative?

A derivative is a type of financial instrument whose value is based upon the value of an underlying asset, index, rate or reference point. Derivatives can involve the physical delivery of an underlying asset by one party to the other party, or the cash payment of an amount that has been calculated by reference to an underlying asset, index, rate or reference point. They can be used to limit a party's exposure to a variable or allow a party to gain exposure to that variable. Therefore a derivative is a financial instrument that has a legal character and value that is distinct but derived from the value of the applicable underlying asset, index, rate or reference point.

Many different types of entity enter into derivatives such as banks and investment firms, corporates, governments, local authorities and supranational authorities. They are generally traded on the wholesale market although certain derivative products are also entered into by both high net worth individuals and retail investors.

It is worth noting that while repurchase agreements