Derivatives A security whose price is dependent upon or derived from one or more underlying assets.

The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. A financial contract whose value is based on, or derived from, a traditional security !such as a stock or bond", an asset !such as a commodity", or a market #utures contracts, forward contracts, options and swaps are the most common types of derivatives. $erivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivative Security #utures, forwards, options, and other securities except for regular stocks and bonds. The value of nearly all derivatives are based on an underlying asset, whether that is a stock, bond, currency, index, or something else entirely. $erivative securities may be traded on an exchange or over%the%counter. $erivatives are often traded as speculative investments or to reduce the risk of one&s other positions. 'rominent derivative exchanges include the (hicago Mercantile )xchange and )uro next *I##).

Derivative. $erivatives are financial products, such as futures contracts, options, and mortgage% backed securities. Most of derivatives& value is based on the value of an underlying security, commodity, or other financial instrument. #or example, the changing value of a crude oil futures contract depends primarily on the upward or downward movement of oil prices. An e+uity option&s value is determined by the relationship between its strike price and the value of the underlying stock, the time until expiration, and the stock&s volatility. (ertain investors, called hedgers, are interested in the underlying instrument. #or example, a baking company might buy wheat futures to help estimate the cost of producing its bread in the months to come. ,ther investors, called speculators, are concerned with the profit to be made by buying and selling the contract at the most opportune time. *isted derivatives are traded on organized exchanges or markets. ,ther derivatives are traded over%the%counter !,T(" and in private transactions. Features : -. $erivative are of three kinds future or forward contract, options and swaps and underlying assets can be foreign exchange, e+uity, commodities markets or financial bearing assets. .. As all transactions in derivatives takes place in future specific dates it is easier to short sell then doing the same in cash markets because an individual can take of markets and take the position accordingly because one has more time in derivatives.

/.

0ince derivatives have standardized terms due to which it has low counterparty risk, also transactions costs are low in derivative market and hence they tend to be more li+uid and one can take large positions in derivative markets +uite easily.

1.

2hen value of underlying assets change then value of derivatives also changes and hence one can construct portfolio which is needed by one and that too without having the underlying asset. 0o for example if one want to buy some stock and short the market then he can buy the future of a stock and at the same time short sell the market without having to buy or sell the underlying assets.

Definition of 'Spot Trade' The purchase or sale of a foreign currency or commodity for immediate delivery. 0pot trades are settled on the spot , as opposed to at a set date in the future. #utures transactions that expire in the current month are also considered spot trades. Also known as cash trades . Definition of 'Futures Contract' A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre%determined price in the future. #utures contracts detail the +uality and +uantity of the underlying asset3 they are standardized to facilitate trading on a futures exchange. 0ome futures contracts may call for physical delivery of the asset, while others are settled in cash. 'Futures Contract' The terms futures contract and futures refer to essentially the same thing. #or example, you might hear somebody say they bought oil futures , which means the same thing as oil futures contract . If you want to get really specific, you could say that a futures contract refers only to the specific characteristics of the underlying asset, while futures is more general and can also refer to the overall market as in4 5e&s a futures trader. Definition of 'Forward Contract' A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date. Investopedia explains &#orward (ontract& Most forward contracts don&t have standards and aren&t traded on exchanges. A farmer would use a forward contract to lock%in a price for his grain for the upcoming fall harvest. Options An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, 6ust like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. $efinition of &(all ,ption& An agreement that gives an investor the right !but not the obligation" to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

It may help you to remember that a call option gives you the right to call in !buy" an asset. 7ou profit on a call when the underlying asset increases in price. $efinition of &'ut ,ption& An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. 2hat is the difference between forward and futures contracts8 #undamentally, forward and futures contracts have the same function4 both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price. 5owever, it is in the specific details that these contracts differ. #irst of all, futures contracts are exchange%traded and, therefore, are standardized contracts. #orward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. 9ecause forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. #utures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never. 0econdly, the specific details concerning settlement and delivery are +uite distinct. #or forward contracts, settlement of the contract occurs at the end of the contract. #utures contracts are marked%to% market daily, which means that daily changes are settled day by day until the end of the contract. #urthermore, settlement for futures contracts can occur over a range of dates. #orward contracts, on the other hand, only possess one settlement date. *astly, because futures contracts are +uite fre+uently employed by speculators, who bet on the direction in which an asset&s price will move, they are usually closed out prior to maturity and delivery usually never happens. ,n the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset&s price, and delivery of the asset or cash settlement will usually take place.

Future and options 0ummary -. A future is a contract which is governed by a pre%determined price for selling and buying at a future period. In options, there is the right to sell or purchase of underlying assets without any obligation. .. A future trading has open risk. The risk in option is limited. /. The size of the underlying stock is usually huge in future trading. ,ption trading is of normal size. 1. #utures need no advance payment. ,ptions have the advance payment system of premiums. :ead more4 $ifference 9etween #utures and ,ptions ; $ifference 9etween ; #utures vs ,ptions http4<<www.differencebetween.net<business<difference%between%futures%and% options<=ixzz/+>x7m?@@