Category : Finance Issues
It’s a contract or agreement for exchange of payments and whose value is derived from the value of its underlying assets.
Therefore,It is a financial Instrument which derives its value/price from the underlying assets.This underlying can be assets,index, or interest rates.
It can be used for various purposes including insuring against price fluctuations which is hedging.
Derivatives consists of Forward, Options, Futures and Swap.
Derivatives are of two types.
1). Privately traded Over The Counter Derivatives like swap and
2). Exchange traded Derivatives.
Types of Derivatives:
Forward,Futures,Options and Swap.
A forward contract is an agreement between two parties – a buyer and a seller to purchase or sell something at a later date at a price agreed upon today.A forward contract is non standardized contract and can be used for hedging or speculation.Forward contract is traded over the counter.
A Futures Contract is a standardized Forward contract and a legal agreement between to parties to buy or sell something at a predetermined price at a specified time in the future.Primarily the underlying assets are Commodity and financial instruments.
E.g. Metal,Oil,Gas,Stocks, Bonds,Shares,Currencies.
An option is a contract that offers the buyer a right but not an obligation to buy(call) or sell(put) a security or a financial instrument at an agreed strike price on a specified time based on the form of options.
A call option gives the right to buy the underlying assets but not an obligation.
Likewise a put option gives a right to sell the underlying assets.
A swap is a derivative contract through which two parties exchange financial instruments.Swaps involve cash flows based on notional principal amount that both parties agree to.It is traded over the counter only through banks.Basically swap takes place at a predetermined time as stipulated in the contract.Swap is of two types.One is Interest rate swap and the other one is Currency swap.