Understanding of Derivatives

A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps. Futures- A Futures Contract is a legally binding agreement to buy or sell any underlying security at a future date at a predetermined price. Options- Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a ‘call’ option or a ‘put’ option.