Derivatives are financial contracts whose value is derived from the value of an underlying investment.

Derivatives can be either exchange traded, when they are bought or sold on a recognised exchange, or they can be over-the-counter (OTC), when they are created and sold directly to customers by banks and other financial institutions.

An OTC instrument is tailored to suit the requirements of the client. Whereas, an exchange traded contract has standardised terms and conditions. This makes them cheaper to enter into and easier to trade on an exchange.