Feb 17, 2023

Different Types of Derivatives

Depending upon the conditions of a contract, derivatives can be of the following types –

• Futures – A futures contract is a legal agreement between two parties to buy or sell the underlying asset at a predetermined future date and price. The contract is executed directly through a regulated and organised exchange.
• Forwards – Forward contracts are similar to futures except the deal is not made through an organised or regulated exchange. Since these are Over-The-Counter (OTC) contracts, they carry more counterparty risk for both parties involved.
• Options – An options contract gives a trader the right but not an obligation to buy or sell an underlying asset at a predetermined future date and price.
• Swaps – A swap is a contractual agreement between two parties to exchange cash flows at a future date based on a pre-planned formula. Similar to forwards, they are OTC contracts and consequently not traded on exchanges.