Define derivative securities.

Derivative securities are financial instruments whose value is derived from an underlying asset, index, or reference rate. They are contracts between two or more parties, with no initial transfer of funds (except for premiums in options). The four primary types are:

• Futures: Standardized agreements to buy/sell an asset at a predetermined price on a future date.
• Forwards: Customized contracts similar to futures but traded over-the-counter (OTC).
• Options: Contracts granting the right (not obligation) to buy (call) or sell (put) an asset at a fixed price.
• Swaps: Agreements to exchange cash flows (e.g., interest rate swaps).

Derivatives are used for hedging (risk management), speculation, and arbitrage. Their value depends entirely on the underlying asset’s price movements, making them highly leveraged and volatile. Regulatory frameworks (e.g., Basel III) now emphasize transparency and risk controls due to their systemic impact.