Derivative

What Does Derivative Mean?

A security whose price is dependent upon or derived from one or more underlying assets. The derivative
itself is merely a contract between two or more parties. Its value is determined by fluctuations in the
underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies,
interest rates and market indexes. Most derivatives are characterized by high leverage. 

Investopedia explains Derivative

Futures contracts, forward contracts, options and swaps are the most common types of derivatives.
Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on
weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative
purposes. For example, a European investor purchasing shares of an American company off of an
American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding
that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified
exchange rate for the future stock sale and currency conversion back into Euros.

Derivative

The derivative of a function represents an infinitesimal change in the function with respect to one of its variables.

The "simple" derivative of a function with respect to a variable is denoted either or

(1

often written in-line as . When derivatives are taken with respect to time, they are often denoted using

Newton's overdot notation for fluxions,

(2

The "d-ism" of Leibnitz's eventually won the notation battle against the "dotage" of Newton's fluxion notation

(P. Ion, pers. comm., Aug. 18, 2006).

When a derivative is taken times, the notation or

(3

is used, with

(4

etc., the corresponding fluxion notation.

When a function depends on more than one variable, a partial derivative

(5

can be used to specify the derivative with respect to one or more variables.

The derivative of a function with respect to the variable is defined as

(6

but may also be calculated more symmetrically as

(7

provided the derivative is known to exist.

It should be noted that the above definitions refer to "real" derivatives, i.e., derivatives which are restricted to

directions along the real axis. However, this restriction is artificial, and derivatives are most naturally defined in the

complex plane, where they are sometimes explicitly referred to as complex derivatives. In order for complex

derivatives to exist, the same result must be obtained for derivatives taken in any direction in the complex plane.

Somewhat surprisingly, almost all of the important functions in mathematics satisfy this property, which is equivalent

to saying that they satisfy the Cauchy-Riemann equations.

These considerations can lead to confusion for students because elementary calculus texts commonly consider only

"real" derivatives, never alluding to the existence of complex derivatives, variables, or functions. For example,
textbook examples to the contrary, the "derivative" (read: complex derivative) of the absolute value function

does not exist because at every point in the complex plane, the value of the derivative depends on the direction in
which the derivative is taken (so the Cauchy-Riemann equations cannot and do not hold). However, the real

derivative (i.e., restricting the derivative to directions along the real axis) can be defined for points other than as

(8

As a result of the fact that computer algebra programs such as Mathematica generically deal with complex variables

(i.e., the definition of derivative always means complex derivative), correctly returns unevaluated by such

software.

If the first derivative exists, the second derivative may be defined as

(9

and calculated more symmetrically as

(10

again provided the second derivative is known to exist.

Note that in order for the limit to exist, both and must exist and be equal, so the function must be

continuous. However, continuity is a necessary but not sufficient condition for differentiability. Since some

discontinuous functions can be integrated, in a sense there are "more" functions which can be integrated than

differentiated. In a letter to Stieltjes, Hermite wrote, "I recoil with dismay and horror at this lamentable plague of

functions which do not have derivatives."

A three-dimensional generalization of the derivative to an arbitrary direction is known as the directional derivative. In

general, derivatives are mathematical objects which exist between smooth functions on manifolds. In this formalism,

derivatives are usually assembled into "tangent maps."

Performing numerical differentiation is in many ways more difficult than numerical integration. This is because while

numerical integration requires only good continuity properties of the function being integrated, numerical

differentiation requires more complicated properties such as Lipschitz classes.

Simple derivatives of some simple functions follow:

(11
 )

(12

(13

(14

(15

(16

(17

(18

(19

(20

(21

(22

(23

(24

(25

(26

(27

(28

)
 (29

(30

(31

(32

(33

(34

(35

where , , etc. are Jacobi elliptic functions, and the product rule and quotient rule

have been used extensively to expand the derivatives.

There are a number of important rules for computing derivatives of certain combinations of functions. Derivatives of

sums are equal to the sum of derivatives so that

(36

In addition, if is a constant,

(37

The product rule for differentiation states

(38

where denotes the derivative of with respect to . This derivative rule can be applied iteratively to yield derivative

rules for products of three or more functions, for example,

(39

(40

)
 (41

The quotient rule for derivatives states that

(42

while the power rule gives

(43

Other very important rule for computing derivatives is the chain rule, which states that for ,

(44

or more generally, for

(45

where denotes a partial derivative.

Miscellaneous other derivative identities include

(46

(47

If , where is a constant, then

(48

so

(49

Derivative identities of inverse functions include

A vector derivative of a vector function

(53

can be defined by

(54

The th derivatives of for , 2, ... are

(55

(56

(57

The th row of the triangle of coefficients 1; 1, 1; 2, 4, 1; 6, 18, 9, 1; ... (Sloane's A021009) is given by the absolute

values of the coefficients of the Laguerre polynomial .

Faà di Bruno's formula gives an explicit formula for the th derivative of the composition .

The June 2, 1996 comic strip FoxTrot by Bill Amend (Amend 1998, p. 19; Mitchell 2006/2007) featured the following

derivative as a "hard" exam problem intended for a remedial math class but accidentally handed out to the normal

class:

(58

)
SEE ALSO: Blancmange Function, Calculus, Carathéodory Derivative, Cauchy-Riemann Equations, Chain Rule,
Comma Derivative, Complex Derivative, Complex Differentiable, Convective Derivative, Covariant Derivative,

Definite Integral, Differentiable, Differential Calculus, Differentiation, Directional Derivative, Euler-Lagrange

Derivative, Faà di Bruno's Formula, Finite Difference, Fluxion, Fractional Calculus, Fréchet Derivative, Functional

Derivative, Implicit Differentiation, Indefinite Integral, Integral, Lie Derivative, Logarithmic Derivative, Numerical

Differentiation, Pincherle Derivative, Power Rule, Product Rule, q-Derivative, Quotient Rule, Schwarzian Derivative,

Total Derivative, Weierstrass Function

A derivative is a security, the value of which depends on the value of another asset. The asset in which its value

depends is called the underlying asset. Derivatives are used for both hedging risk and as high risk investments.

There is a wide range of different types of derivatives available. The commonest are futures, options and warrants.

Swaps are also important.

Contracts for difference are also common. They are widely used to provide derivatives of an underlying number that

can not itself be directly traded (index values, weather etc.) and to provide access to derivatives for retail investors.

Derivatives are used for hedging by buying a derivative with a value that moves against that of another investment

that an investor holds. For example, shares in a given company can be hedged by buying put options in the same

company.

As speculative investments, derivatives allow investors to:

 Make a greater gain (or loss!) from the same price movement than would result
from buying the underlying.
 Make a gain from a fall in the price of the underlying.
 Arbitrage certain inconsistencies between the prices of other investments

The common types of derivatives (e.g. futures and options) are sometimes described as vanilla, while more complex

types are described as exotic.

Derivatives can be embedded in other financial instruments to create securities such as structured notes.

The valuation of derivatives on balance sheets has often been a concern for investors. This has only been partially

addressed by improvements to accounting standards.

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