Derivative (finance)

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.[1][2]
Under U.S. law and the laws of most developed countries, derivatives have special legal exemptions which make them a particularly attractive legal form through which to extend credit. [3] However, the strong creditor protections afforded to derivatives counterparties--in combination with their complexity and lack of transparency--can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. [3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy. [3][4] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives--including greater access to government guarantees--while minimizing disclosure to broader financial markets. [5]
One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.[6]

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