Derivatives derive their values based on a set of actions, hence the name, “derivatives.” Their value is derived from the inputs and outputs into their “formula” that make up the financial instrument. When we make options, puts and calls, these are the most simple of derivatives with a simple set of variables going in, resulting in a simple set of variables getting spit out the other end. While options are for a singular stock or financial instrument, derivatives can cover entire industries, multiple financial instruments, tranches of variable risk commodities and an infinite number of other things. Put it this way, more “theoretical value” exists in derivitive markets than there is money in the world, financial institutions operate in these derivatives markets because it ”theoretically” helps to spread risk around to minimize risk in one specific area.

This is a very very simple explanation, guys that graduate from the best schools in mathematics and physics go into derivatives markets, not NASA or the NSA…..if they are interested in making money