Understanding Derivatives

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What are Derivatives?

A derivative is a financial contract that derives its value from an underlying asset or a group of assets.

So what are the different types of derivatives?

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Futures

A futures contract is a financial derivative that obliges the buyer and seller to exchange an underlying asset at a pre-determined price on an agreed-upon expiry date.

Options

These are very similar to futures contract but with a little contrast.

The futures contracts involve an obligation whereas options give the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price before the contract’s expiration.

Forwards

A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date.

Check out my blog post to understand more about this

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