Which best defines a 'derivative' in financial terms?

A derivative is fundamentally defined as a financial contract whose value is derived from the performance of an underlying asset, index, or group of assets. This means that the pricing and value of a derivative are contingent upon the fluctuations in the value of another financial asset, such as stocks, bonds, commodities, or interest rates. This characteristic allows derivatives to be used for various purposes, including hedging risk, speculation on price movements, or achieving leverage in investment strategies.

In the context of the other options, a financial instrument that pays a fixed interest rate pertains to traditional fixed-income securities, which do not reflect the nature of a derivative. A convertible bond, which is mentioned in another option, is a specific type of bond with its own characteristics distinct from derivatives. Similarly, a mutual fund specializing in commodities is an investment vehicle that does not rely on the concept of derivatives. Thus, the definition encapsulated in the correct choice accurately reflects the essence of what derivatives are in the financial markets.