Financial Derivatives Law and Legal Definition

Financial derivatives are financial instruments that are linked to another specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. The value of a financial derivative is based on the price of an underlying item, such as an asset or index. Unlike debt instruments, financial derivatives do not require the advance of principal amounts that are required to be repaid and do not generate investment income. Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, and speculation. Financial derivatives are excluded from direct investment.