Ta-Nehisi Coates on The Atlantic was asking people to explain derivatives in a way people could understand. Here's the beginning of my crack at it
See this scrap of paper? It's not worth anything, right? Right. It's just a scrap of paper. But I'm a financial wizard. I'm going to cast a financial spell. I'm going write some magic words on the paper. Those words are:
"If the price of gold drops a lot, I, Fantasticus the Wizard, will pay the owner of this scrap of paper a bunch of money."
Using magic, I have just turned this useless scrap of paper into a derivative!