Legal Definitions - derivative

The term derivative generally refers to something that originates from or is based on another source. In legal and financial contexts, it has specific meanings:

• Financial Derivative: In finance, a derivative is a contract whose value is directly tied to, or "derived" from, the market value of an underlying asset, index, or interest rate. Parties to a derivative contract agree to exchange payments based on how the value of that underlying item changes over time. These instruments are often used for hedging (reducing risk) or speculation (betting on future price movements).

  • Example 1: Coffee Futures Contract

    A large coffee roasting company wants to ensure it can buy coffee beans at a predictable price in six months, regardless of market fluctuations. It enters into a futures contract to buy 10,000 pounds of coffee beans at a set price per pound for delivery in six months. This futures contract is a derivative because its value is derived from the future market price of coffee beans. If the market price of coffee beans rises significantly by the delivery date, the contract becomes more valuable to the coffee company, as they can buy at the lower, agreed-upon price.

  • Example 2: Stock Option

    An investor believes that the stock price of "Tech Innovations Inc." will increase significantly in the next three months. Instead of buying the stock outright, they purchase a call option contract. This option gives them the right, but not the obligation, to buy 100 shares of Tech Innovations Inc. at a specific price (the "strike price") before a certain date. This call option is a derivative because its value is entirely dependent on the market price of Tech Innovations Inc. stock. If the stock price rises above the strike price, the option becomes profitable; if it stays below, the option may expire worthless.

• Copyright Derivative Work: In copyright law, a derivative work is a new creative work based on one or more pre-existing works. It transforms, adapts, or recasts the original work in some way, but still retains elements of the original. Creating a derivative work typically requires permission from the copyright holder of the original work.

  • Example 1: A Graphic Novel Adaptation

    A publisher decides to create a graphic novel version of a classic science fiction novel. The graphic novel uses the original characters, plot, and setting, but translates the story into a visual, comic-book format with new illustrations and dialogue adaptations. This graphic novel is a derivative work because it is directly based on and adapted from the pre-existing copyrighted novel.

  • Example 2: A Film Score Based on a Play's Themes

    A composer is hired to create a musical score for a new film adaptation of a famous stage play. While the score is original music, it incorporates specific melodic themes and emotional motifs that are directly inspired by and intended to evoke the mood and character arcs established in the original play. This film score, particularly if it extensively reinterprets or samples elements from an existing musical version of the play, could be considered a derivative work as it builds upon the artistic foundation of the original dramatic piece.

• Derivative Acquisition: In property law, a derivative acquisition refers to the process of gaining ownership of property from a previous owner. This is in contrast to an "original acquisition," where someone gains ownership of property that was previously unowned or created by them (e.g., finding an abandoned item or creating a new invention).

  • Example: Purchasing a Used Car

    When you buy a used car from a dealership or a private seller, you are engaging in a derivative acquisition. The car was previously owned by someone else, and your ownership is derived from their prior ownership through a sale and transfer of title. You did not create the car, nor did you find it unowned; you acquired it from a previous owner.