Definitions 
Derivatives are instruments, such as options and futures contracts, which derive their value from the value of an underlying security, group of securities or an index.
The main use of derivatives is to minimize risk for one party while offering the potential for a high return (at increased risk) to another. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market.
Example: Use of Derivatives
A classic example is a farmer who wishes to sells his crop to a speculator before the harvest. This is known as a futures contract. By doing this, the farmer transfers (offloads, hedges) the risk that prices may fall. The speculator on the other hand is willing to accept the risk and will receive any potential benefit if the price goes up.
Examples of derivatives are futures, options, swaps.
