Financial derivatives are contracts whose economic outcome depends on a reference value, such as a security, commodity, market index, interest rate or exchange rate. They are used to transfer or trade exposure to movements in that reference value without necessarily buying or selling the underlying item itself. The risks concerned may relate to interest rates, currencies, share prices, commodities or the creditworthiness of a borrower. Unlike conventional borrowing or investment, a derivative normally does not involve the payment of a principal amount that is later repaid, nor does it produce interest or dividend income.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.