What are financial derivatives?

Financial derivatives are instruments whose value is derived from the performance of underlying assets, indices, or interest rates. This means that the worth of a derivative depends on the value of something else, such as stocks, bonds, commodities, or interest rates. For instance, options and futures contracts are common types of derivatives that allow investors to speculate on or hedge against changes in the price of the underlying asset.

The essence of derivatives lies in their ability to provide leverage and manage risk, as they can be used to create positions without requiring full upfront investment in the actual asset. Therefore, the definition aligns perfectly with the concept of derivatives being instruments tied to the value of other financial instruments or assets. In this sense, it's about what the derivative represents in terms of its connection to the performance of something else, making this option the most accurate in describing financial derivatives.

Other choices refer to different financial instruments that do not reflect the fundamental characteristic of derivatives. Fixed interest securities, equity securities, and debt securities are distinct from derivatives as they represent ownership or direct debt obligations rather than complex financial instruments based on the value of other underlying assets.