Types of Derivatives

Forwards and futures contracts: Forward and futures contracts are usually discussed together as they share a similar feature: a forward or futures contract is an agreement to buy or sell a specified quantity of an asset at a specified price with delivery at a specified date in the future.

Options contracts: Options contracts can be either standardized or customized. There are two types of option call and put options. Call option contracts give the purchaser the right to buy a specified quantity of a commodity or financial asset at a particular price (the exercise price) on or before a certain future date (the expiration date). Similarly, put option contracts give the buyer the right to sell a specified quantity of an asset at a particular price on a before a certain future date.

Swaps: Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments can be charged on fixed or floating interest rates, depending on contract terms. The calculation of these payments is based on an agreed-upon amount, called the notional principal amount

Underlying assets and derivative products: While forwards, futures, options and swaps can be viewed as the mechanics of derivation, the value of these contracts are based on the prices of the underlying assets.

Equity derivatives: An equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives

Interest rate derivatives: One of the most popular interest rate derivatives is interest rate swap. In one form, it involves a bank agreeing to make payments to a counterparty based on a floating rate in exchange for receiving fixed interest rate payments. It provides an extremely useful tool for banks to manage interest rate risk.

Commodity derivatives: Commodity derivatives are investment tools that allow investors to profit from certain items without possessing them. Initially, the idea behind commodity derivatives was to provide a means of risk protection for farmers. They could promise to sell crops in the future for a pre-arranged price.

Get industry recognized certification – Contact us

Menu