Derivatives originated to help reduce risk in volatile financial markets. A derivative is a financial instrument derived from an underlying asset, such as a stock or bond. Derivatives allow parties to exchange cash or assets over time based on the value of the underlying asset. There are several types of derivatives including forwards, futures, options, warrants, and swaps. Forwards and futures involve an agreement to buy or sell an asset at a set price on a future date. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows of an underlying asset between two parties according to a prearranged formula.