Types of Derivative Products

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 23, 2021

Derivative Products

What is Forwards Contract?

A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today.
The main features of forward contracts are :
– They are bilateral contracts and hence exposed to counter-party risk.
– Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.
– The contract price is generally not available in public domain.
– The contract has to be settled by delivery of the asset on expiration date.
– In case the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.

What is Futures Contract?

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price.
There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.
To make trading possible, Exchange specifies certain standardized features of the contract.

What is Options ?

An option is a financial contract that gives an investor the right, but not the obligation, to either buy or sell an asset at a pre-determined price (known as the strike price) by a specified date (known as the expiration date).
Many options are created in a standardized form and traded on an options exchange.
Every option represents a contract between the options writer and the options buyer.

Types of Options

Call Options

A buyer of a call option has the right to buy the underlying asset for a certain price.

Put Options

The buyer of a put option has the right to sell the underlying asset for a certain price.

Factors Impact Options Premiun

Swaps

• Basic English meaning of Swap is exchange or exchange a thing in return of another.
• In finance, the Swaps definition is nothing but the exchange of cash flows.
• Or in other words, we can define it as an OTC derivative contract between two parties exchanging a sequence of cash flows with another at a predetermined rate in the future period mutually agreed between them.

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Futures Contract
Future vs Forward
Application of Futures
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Types of Derivative Products