Derivatives

Derivatives are securities which are linked and valued based on a stock, bond, currency or a commodity. The four main groups of derivative contracts are futures, forwards, options and swaps.

A quick overview of the four groups. Futures and Forwards are essentially the same concept, two parties must be involved taking opposite views on the exchange of the underlying in the future. The difference is that futures are exchange-traded contracts and are standardised. A Forward contract is the same concept, but the contract is decided between the two counterparties to the trade. Option contracts can be either a Call Option, the right to Buy, or a Put Option, the right to Sell. Swaps are essentially an exchange of cash flows, for example in Interest Rates Swaps from Fixed to Floating or the other way around.