Derivatives are contracts whose values are based on underlying assets, and are determined by the rise and fall of that underlying asset. Prime examples of this include futures contracts and Contracts for Difference (CFDs). Derivative markets are markets on which these derivatives can be traded. Most derivatives are traded over-the- counter (OTC), and are not regulated by government authorities, which means they are far riskier than the derivatives that are traded on regulated exchanges.
The most commonly traded derivatives are futures contracts, in which the buyer and seller mutually agree on a price that reflects what they believe will be representative of the asset at a predetermined future date. Other derivatives include CFDs, forward contracts, options, and interest rate swaps.