Meanings of “price of the derivative”
@Tim - in this case, a futures contract isn't like an options contract. It's simply a method of entering into an agreement for delivery at a future date.  While the speculators appear to have taken over, there are practical examples of use of the futures market.  I am a gold miner and I see that my cost is $1200/oz given my quality of ore. I see the price of gold at $1600 and instead of worrying that if it goes too low, I run at a loss, I take advantage and sell contracts to match my production for the next year (or as long as the contracts go, I forget how far out gold futures are).  Of course I give up the higher price if gold goes higher, but this scenarion isn't speculation, it's a business decision.  The bread maker, on the other hand, might buy wheat futures to guarantee his prices for the next year. No, it means what it says. Prices change, hence price of the derivative can go down even if the price of the underlying doesn't change (e.g. theta decay in options).
An additional way to get a better grip on the mechanics of what you're looking to do is to use a paper trading tool. For example, thinkorswim gives you $200k in virtual money to trade with- money you don't have to worry about as you might initially make mistakes in trading futures. As mentioned above, each product has it's own pricing and trading options on futures (derivatives of derivatives) is even more confusing, so you'll be well-served by a risk-free learning tool. "Derivatives derive their value from underlying assets.  This is expressed by the obligation of at least one counterparty to trade with the other counterparty in the future.  These can take on as many combinations as one can dream up as it is a matter of contract. For futures, where two parties are obligated to trade at a specific price at a specific date in the future (one buyer, one seller), if you ""short"" a future, you have entered into a contract to sell the underlying at the time specified.  If the price of the future moves against you (goes up), you will have to sell at a loss.  The bigger the move, the greater the loss.  You go ahead and pay this as well as a little extra to be sure that you satisfy what you owe due to the future.  This satisfaction is called margin. If there weren't margin, people could take huge losses on their derivative bets, not pay, and disrupt the markets.  Making sure that the money that will trade is already there makes the markets run smoothly. It's the same for shorting stocks where you borrow the stock, sell it, and wait.  You have to leave the money with the broker as well as deposit a little extra to be sure you can make good if the market moves to a large degree against you." Duration is the weighted average time until all the cash flows of a fixed income security are received. There are a few different measures of duration but generally, duration measures the sensitivity of the price of a fixed income asset to a change in the yield of that asset. If you're familiar with calculus, duration is the first derivative of price with respect to yield.  Convexity is the sensitivity of the duration of bond with respect to changes in yield, or the second derivative.   The first chart [here](http://www.investopedia.com/terms/c/convexity.asp#axzz1x4F075zM) will help. Convexity measures the curvature of the blue or pink line, the steeper the curve the higher the convexity.   The more cash flows there are in a bond (higher or more frequent coupon) the lower the duration, because you are receiving more of your investment earlier as opposed to later (think time value of money). If a bond has one cash flow, meaning you get paid back only at maturity (zero coupon) then any changes in interest rates will have a greater impact on the price of the bond since you are discounting only one cash flow in the future. Think of buying a bond with no coupons and a 5% yield that matures in 5 years, or a bond with similar yield and maturity buy pays a coupon. If interest rates rise, the zero coupon bond's price will fall more than the bond with coupons. Why? Because if you own the zero coupon bond you have to wait 5 years to get your money back and reinvest it at the higher rate, while if you have the bond that pays coupons you can reinvest those incremental cash flows at the higher rate, even though at purchase they had the same yield and maturity.  These are both tough concepts that took me a fair amount of time to really understand. If you're investing in bonds or any fixed income asset, these topics are crucial to understanding interest rate risk. The most obvious use of a collateral is as a risk buffer. Just as when you borrow money to buy a house and the bank uses the house as a collateral, so when people borrow money to loan financial instruments (or as is more accurate, gain leverage) the lender keeps a percentage of that (or an equivalent instrument) as a collateral. In the event that the borrower falls short of margin requirements, brokers (in most cases) have the right to sell that collateral and mitigate the risk.  Derivatives contracts, like any other financial instrument, come with their risks. And depending on their nature they may sometimes be much more riskier than their underlying instruments. For example, while a common stock's main risk comes from the movements in its price (which may itself result from many other macro/micro-economic factors), an option in that common stock faces risks from those factors plus the volatility of the stock's price.  To cover this risk, lenders apply much higher haircuts when lending against these derivatives. In many cases, depending upon the notional exposure of the derivative, that actual dollar amount of the collateral may be more than the face value or the market value of the derivatives contract. Usually, this collateral is deposited not as the derivatives contract itself but rather as the underlying financial instrument (an equity in case of an option, a bond in case of a CDS, and so on). This allows the lender to offset the risk by executing a trade on that collateral itself. Yes, and heres some pretty scary stats.  Global debt went from about 200% of GPD in 2007 to 325% of GDP today.  Global Debt is about 2.5x more than the value of global broad money (all the money in the world).  The value of the derivatives market has increased to 6x the value of all global debt.  Meaning a global market of packaging and trading debt exists that is 6x the value of the debt being traded, and 15x the value of all the money in the world. "The VIX is a mathematical aggregate of the implied volatilities of the S&P 500 Index components. It itself cannot be traded as there currently is no way to only hold a position on an implied volatility alone.  Implied volatility can only currently be derived from an option relative to its underlying.  Further, the S&P 500 index itself cannot be traded only the attempts to replicate it.  For assets that are not tradable, derivatives can be ""cash settled"" where the value of the underlying is delivered in cash.  Cash settlement can be used for underlyings that in fact due trade but are frequently only elected if the underlying is costly to deliver or there is an incentive to circumvent regulation. Currently, only futures that settle on the value of the VIX at the time of delivery trade; in other words, VIX futures holders must deliver on the value of the VIX in cash upon settlement.  Options in turn trade on those futures and in turn are also cash settled on the value of the underlying future at expiration. The VXX ETF holds one to two month VIX futures that it trades out of before delivery, so while it is impossible to know exactly what is held in the VXX accounts unless if one had information from an insider or the VXX published such details, one can assume that it holds VIX futures contracts no later than two settlements from the preset.  It should be noted that the VXX does not track the VIX over the long run because of the cost to roll the futures and that the futures are more stable than the VIX, so it is a poor substitute for the VIX over time periods longer than one day. ""Underlying"" now implies any abstract from which a financial product derives its value." cost of carry is a confusing term to use but this is what i was given to work with   then again, once you factor in interest rate risk and default risk (if you do), what is a better term?  it's not just cost of capital at that pt "&gt; From what I understand, the prices of futures are decided after the parties ""discover"" the price they think is appropriate for the underlying asset after some time.   What do you mean by that? The price you buy a futures contract at in the market is the price you get.  The concept of price discovery doesn't always apply as directly to derivatives as it does to equities. When you buy a futures contract not only are you aiding price discovery for the underlying asset, you're also signaling the value of tangible things like storage, weather, and transportation costs as well as intangibles such as future macroeconomic events, global policy decisions, etc.  Also consider that derivatives markets have significant percentages of market participants who are hedgers. The classic example is a farmer who's going to be harvesting his corn in Oct/Nov but wants to ""lock in"" the price of his corn right now. So he can sell futures contracts (for delivery any time after Nov) at whatever they happen to be priced at currently in the market. Maybe he sells Dec contracts for 400 (400 cents per bushel, 5k bushels per contract assuming he's based in the US and trading these at [CME](http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html)). Whatever happens to the price of corn between now and December, he knows he can deliver his corn for $4/bushel."