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Some commonly used Derivatives

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Posted by : NIFM
24 October, 2013, 4:33 PM
Here we define some of the more popularly used derivative contracts. Forwards : A forward contract is an agreement between two entities to buy or sell the underlying asset at a future date, at today’s pre-agreed price. Futures : A future contract is an agreement between two parties to buy or sell the underlying asset at a future date at today’s future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. Options : There are two types of options – Call and Put. A call option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. A Put option gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants : Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer dated options are called warrants and are generally traded over the counter. Baskets : Basket options are  options on portfolios of underlying assets. The underlying asset are usually a weighted average of a basket of assets. Equity index options are a form of a weighted average of a basket of assets. Equity Index Options are a form of basket options. Swaps : Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The Two commonly used swaps are : Interest rate swaps : These entail swapping only the interest related cash flows between the parties in the same currency. Currency Swaps : These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction

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