What Is a Derivative Contract and How Does It Derive Its Value?
A derivative contract is a financial instrument whose value is derived from and dependent upon an underlying asset. Instead of trading the asset itself, traders agree to terms based on the asset's future price.
The contract's value changes as the price of the underlying asset changes. Common examples include futures, options, and swaps, all used for hedging, speculation, and arbitrage.
Glossar
Market Liquidity
Depth ⎊ Market liquidity, within cryptocurrency and derivatives, fundamentally reflects the capacity to execute substantial transaction sizes with minimal price impact; this is particularly critical in nascent digital asset markets where order book depth can be comparatively shallow.
Notional Value
Scale ⎊ Notional Value refers to the total market value of the underlying asset controlled by a derivatives position, calculated by multiplying the contract size by the current market price, irrespective of the actual margin capital posted.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.