Derivatives are contracts whose values are tied to price changes of underlying securities. A typical currency derivative gives its owner the right or obligation to buy or sell a block of dollars, yen or other currency over a given period at a set exchange rate. Interest-rate derivatives are like insurance policies that pay off if rates move up or down a specified amount during the time covered.
In one important use, derivatives can neutralize risks. An American company that must exchange dollars for yen to buy goods from Japan could use a currency derivative to make up the difference if the dollar falls and Japanese goods become more expensive. Essentially, the contract would allow the company to lock in today's exchange rate for a given period. The American company would lose money on the derivative contract if the dollar got stronger instead of weaker, but that would be offset by the lower cost of Japanese goods as dollars were exchanged for yen.
A company could, however, use the same currency contract to speculate, by simply buying a contract in hopes it becomes more valuable as exchange rates change. Since the change in the contract's value would not be counterbalanced by a gain or loss in the purchase of Japanese goods, the company would suffer a net loss if the dollar strengthened and the contract loses value. This is speculation.
Source: http://knowledge.wharton.upenn.edu/article/the-role-of-derivatives-in-corporate-finances-are-firms-betting-the-ranch/
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