Derivative

A derivative is a security whose price is dependent on one or more underlying assets.  The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.  Derivatives are generally used as an instrument for hedging risk, but can also be used for speculative purposes.

The derivative itself is merely a contract between two or more parties, and therefore derivatives are zero-sum games. Most derivatives are characterized by high leverage and hence Buffett has called them the “financial weapons of mass destruction”.