Definition:
The term “derivative” (the financial term) is best understood with a focus on the root word -- “derive.”
A derivative is a financial instrument (generally in the form of a contract between parties) that derives its value from an underlying asset such as a stock, bond or commodity.
Examples:
If you own a derivative such as a stock option, the value of the option largely depends on variables of the underlying stock that the option is based upon.
Other examples of derivatives: Futures, forwards, swaps, swaptions