Derivative is a financial contract/agreement that does not have any independent value of its own, but derives its value from some other asset, index or anything that is quantifiable (called  underlying) e.g. Sugar is a derivative and sugarcane is the underlying. Fluctuations in sugarcane prices will influence the price of sugar.Derivatives contracts have the price fixed/agreed upon at the start of the contract and is essentially settled on a future date. The underlying could be anything ranging from Stocks,  bonds, commodities & Indices to Interest rates, currencies, Weather & Freights. The derivatives contract prominent in Indian market is Futures and Options.