What is a Derivative?

The term ‘Derivative’ in general means deriving the value from some variable.

Let us consider some examples from our daily lives in order to understand this term better.

• You place a bet with your friend on who will win the cricket world cup. If India wins then your friend will give you 500 and if Australia wins then you will give your friend 500. In this case, the outcome of the bet is derived from which team wins the match. So, this Bet is a derivative of the outcome of the cricket world cup final match.
• The reward points we accumulate on our credit cards or the cash-back we receive are derived from the total amount spent using the credit card.
• Similarly, the frequent flier miles accumulated in our account are derived from the amount spent on air travel.
• The prices of Petrol, Diesel, Gasoline, etc. are derived from the prices of Crude Oil. Assuming other factors remain constant, if the price of crude oil increases, the price of gasoline will also increase and vice versa. Thus, we can say that gasoline prices are a derivative of crude oil prices.