What are Derivatives?

To understand future & options, it is important to have an understanding of Derivatives. It is a financial contract, whose value comes from an underlying asset like stocks, bonds, commodities (like gold or currencies). Instead of owning the asset, you buy a derivatives contract; to earn profits (or incur losses) based on their expectations of the asset’s future price movements. Main Types of Derivatives:

1. Options – Provide the Right (not obligation) to buy/sell an asset at a set price.
2. Futures – Create an Obligation to buy/sell an asset at a fixed price on a future date.
3. Forwards – Like futures, but customized and traded privately (OTC) rather than on Exchanges.
4. Swaps – Exchange of financial instruments, often interest rates or currencies.