A financial derivative is a contract whose value is derived from the performance of an underlying asset, index, or rate. Common types of derivatives include options, futures, and swaps. These instruments are often used for hedging risks or for speculative purposes, allowing investors to bet on the future price movements of assets without owning them directly. Derivatives can be complex and carry significant risks, as their value can fluctuate based on various factors, including market conditions and economic events. They are commonly traded on exchanges or over-the-counter, providing flexibility for investors to manage their financial exposure effectively.