derivative contract

  

Definition

Contract based on (derived from) but independent of another contract, and involving a party not associated with the original (underlying) contract. For example, a juice packager's contract to purchase orange juice (orange derivative) from a juice manufacturer is a derivative contract and has nothing to do with the manufacturer's contract for purchase of oranges from an orange grower, although the price of juice is tied to the price of oranges. Similarly, a contract based on the price of certain shares has nothing to do with the purchase of the shares although their prices are tied. See also derivative security.

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