Derivatives are one type of securities whose price is derived from the underlying assets i.e. a commodity or bond or equity or currency, that is why they are known as derivatives.. As derivatives are merely contracts between two or more parties, anything like weather or rain can be used as underlying assets.
Types of Derivatives are:
1. FUTURE CONTRACTS: Future contracts are no different from forward contracts as they serve the same purpose. The main difference between a future and forward is that Futures are standardized contracts whereas forwards are tailor made. Method of operation of future is also different.
2. FORWARD CONTRACTS: A forward contract is an agreement to buy or sell an underlier at a price specified at a future date. These are simplest of all derivatives.
3. OPTIONS: Options give a right, but not the obligation to buy or sell something at a future date. Option may be call or put option.
4. SWAPS:Swap means exchange. Swap contract is an agreement to exchange two streams of cash flows over a period of time. The use of swap is that it allows a company to borrow capital at fixed rate and later on can exchange its interest payments at floating rate.
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