Derivatives

A financial instrument whose value is derived from the value of an underlying asset, rate, or index. It is a contract between two parties referencing that underlying.

The notional is the amount of the underlying that the derivative contract controls, used to scale payments; it is not necessarily exchanged.

Physical settlement (delivery of the underlying) and cash settlement (exchange of the cash difference in value).

Exchange-traded derivatives are standardized contracts; OTC derivatives are customized/negotiated privately between counterparties.

A CCP (clearinghouse) becomes the buyer to every seller and seller to every buyer, guaranteeing performance and greatly reducing counterparty/credit risk.

Margin (initial and maintenance) is collateral posted to ensure performance and cover potential losses, supporting daily settlement.