In a linear derivative, the payoff varies in a linear fashion with changes in the underlying asset price or reference rate. A price movement in the underlying asset translates directly into a specific dollar value per contract. Interest rate swaps, plain vanilla futures, and cross currency swaps are all linear derivatives.

Nonlinear derivatives are those whose payoffs change with time and space (the location of the strike price in relation to the spot price). A good example would be a call option. At expiry, the payoff is zero if the asset price is below the strike price. If the asset price is above the strike price the payoff is equal to the difference between the spot price and the strike price (S − X). Prior to the scheduled expiration date, the value of the call does not increase at a constant rate when the underlying asset increases in value, neither does it decrease at a constant rate when the value of the underlying decreases.