When you hear most people talk about the causes behind the Great Recession and the 2008 financial crisis the thing that many people point the blame to is derivatives. But when asked what exactly a derivative is, we are met with stutters and stammers. In a few words, a derivative is a bet on a bet.

noun

1. something that is based on another source.

In the world of finance it's a contract that derives it's value not from itself but based on the performance of an underlying asset. The price of the security is based from one or a group of underlying assets, such as stocks, bonds, commodities, currencies, interest rates, and even market indices. The derivative itself is nothing more than a contract between two parties, with the value being determined by the fluctuations in value of its underlying asset or asset group.

Legend has it that the original derivative contract was between Aristotle and Thales over an olive transaction, and Aristotle wound up on the profitable end of the deal.