A derivative is defined as the derived asset of an underlying asset. Derivatives are kind of risk management tools that help the investors and every asset have derivates, they are as follows, stock derivatives, market or index derivatives, forex derivatives, commodity derivatives, interest rate derivatives, etc.
TYPES OF DERIVATIVES
There are usually 4 types of derivatives, they are as follows
A forward contract is customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price for the purchase of the asset.
An agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types of forwarding contracts, In the sense, the former is standardized exchange-traded contracts.
In options, the buyer enjoys the right and not the obligation to buy or sell the underlying asset. There are two types of options, they are
- (i) Call Option – A right to buy an asset at a predetermined price on or before a specific date.
- (ii) Put Options – A right to sell an asset at a predetermined price on or before a specific date.
Swaps are defined as an agreement between two parties to exchange sequences of cash flows for a set period of time. there are various types of swaps and some of them are interest rate swaps, currency swaps, etc.