Derivative

Derivative is a type of security whose value is “derived” from an underlying asset. (Eg; Futures and Options).

Futures and options are both derivatives – meaning a security whose value solely depends on the value of the underlying asset.

  • A future derives its value from the commodities or currencies which it represents
  • An option derives its value from the underlying stock

Futures and options were indistinguishable for most of recorded history – the first example of a derivative trade is from Plato, commenting on an investor who purchased the rights to use olive presses before a harvest, then resold the rights afterwards.

In the 19th century, futures became standardized and regulated in the United States, as they were an essential part of the agriculture market (which is why Futures are traded out of the Chicago Mercantile Exchange in the Midwest, as opposed to New York). Options were standardized later, in the fallout of the stock crash and the Great Depression.

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