Financial assets that “derive” their value from other assets. For example, an option to buy a share is derived from the share. Some politicians and others responsible for financial regulation blame the growing use of derivatives for increasing volatility in asset prices, and for being a source of danger to their users. Economists mostly regard derivatives as a good thing, allowing more precise pricing of financial risk and better risk management. However, they concede that when derivatives are misused the leverage that is often an integral part of them can have devastating consequences. So they come with an economists’ health warning: if you don’t understand it, don’t use it. The world of derivatives is riddled with jargon. Here are translations of the most important bits. * A forward contract commits the user to buying or selling an asset at a specific price on a specific date in the future. * A future is a forward contract that is traded on an exchange. * A swap is a contract by which two parties exchange the cashflow linked to a liability or an asset. For example, two companies, one with a loan on a fixed interest rate over ten years and the other with a similar loan on a floating interest rate over the same period, may agree to take over each other’s obligations, so that the first pays the floating rate and the second the fixed rate. * An option is a contract that gives the buyer the right, but not the obligation, to sell or buy a particular asset at a particular price, on or before a specified date. * An over-the-counter is a derivative that is not traded on an exchange but is purchased from, say, an investment bank. * Exotics are derivatives that are complex or are available in emerging economies. * Plain-vanilla derivatives, in contrast to exotics, are typically exchange-traded, relate to developed economies and are comparatively uncomplicated.