What is derivative?

Please Note: This article is written in a manner that even a common man can read, understand and put the same into practice in real life. I simplified many concepts and omitted important details, for the ease of comprehension

Derivatives are a Jargon from the financial world; made to sound complex. So when a common man reads or hears about it, they get puzzled and believe they can never understand this.

Well, we are going to break this myth:
A derivative is a dependent variable; it can not exist on its own. A derivative is a contract that derives its value from something else.

Let us take an example and understand this better:

• You are planning a tour three months down the line 
• You search for hotels online, do your research and once you find a hotel of your choice you make a booking by paying an advance
• Why did you pay in advance; because you believe that the price of this place might go up and you will end up paying more 
• What happens, if for some reason you can't go for this tour or you found the prices of the hotel are actually much cheaper now. Simple, you will let the advance/token go and probably book a better hotel at a lower cost. The maximum loss you will bear is the advance paid. Furthermore, if your trip works as planned and the price of the hotel has gone up, you will still pay the old price as per your agreement. 

Congratulations! you have been doing derivatives all your life. It is just that you never knew it is called derivatives.