DERIVATIVES Forwards, Futures & Options

Derivative is a financial asset which derives its value from the value of the underlying asset, which could be securities, commodities, bullion, currency, live stock or anything else. There are various types of derivatives contact.

Forwards: is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.

Futures: is a standardized contract between two parties to buy or sell an asset at a certain time in the future at a certain price.

Options: are financial derivatives that give their holders the right to buy or sell a specific asset by a specific time at a given price (strike price). They are of two types i.e., Call option and Put option.

Swaps: are private agreements between two parties to exchange cash flows in the future according to a prearranged formula .