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A derivative is a financial contract /instrument whose

value is derived from the other or economical value
which is called underlying.
In other word we can say one variable derived from the
other variables.
A substance that can be derived from the other
substances .

Type of derivatives

Forward contract
A forward contract is an agreement to buy or sell an
asset on a specified date for a specified price. One of
the parties to the contract assumes a long position and
agrees to buy the underlying asset on a certain
specified future date for a certain specified price. The
other party assumes a short position and agrees to sell
the asset on the same date for the same price. Other
contract details like delivery date, price and quantity
are negotiated bilaterally by the parties to the contract.
The forward contracts are normally traded outside the

On 1st
October ,Mr. Hema enters
into a forward
contract with Mrs. laya and agrees to purchase 500
shares of TATA sons for a predetermined price of RS 130
three months forward. Here on the fixed future date ,Mr.
hema will get 500 shares and will pay the price that is
RS 65000 and Mrs. laya will deliver shares and will
receive the per the terms of the contracts the
settlement will be strictly on maturity date. The holder
of the short position delivers the assets to the holder of
the long position in return for a case amount equivalent
to delivering price.

Assume that an agricultural producer has 2 thousands
ton of corn to sell six months from now, and is concerned
about a potential decline in the price of corn. It therefore
enters into a forward contract with itsfinancial
institutionto sell 2 thousands ton of corn at a price of
Rs 4.30 per in six months, with settlement on acash

Future contract
A futures contract is an agreement between two parties
to buy or sell an asset at a certain time in the future at a
certain price. Futures contracts are special types of
forward contracts in the sense that the former are
standardized exchange-traded contracts.

On 1st January ,Mr. hima enters into a future contracts to
buy 500 share of IBM co at an agreed price of Rs 130
per share in march .if on maturity date (as determined
by the stock exchange during the month of
December ),the price of the equity share rises to Rs 160
per share ,Mr. hima will receive Rs 30 per share and
otherwise if the price of the share falls to Rs 110, Mr.
hima pay Rs 20per share.

ABC Co does nothing and decides to pay the money by converting the INR to USD, if the
spot rate after three months Is Rs 47,the ABC Co will have to pay INR 47,00,000 to buy
USD 100000.Alternatively , if the spot price is Rs 4,30,000, ABC Co Will have to pay only
43,00,000 to buy USD 100000.the point is that ABC Co is not sure of its future liability
and is subject to risk of exchange rate Fluctuations.

Forward vs future

Option contract
o A derivative instrument which gives holder the right,
without obligation, to trade (buy/sell) according to the
specified terms and conditions.
o Options: Options are of two types - calls and puts. Calls
give 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. Puts give 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

An investors buys one European call option on Infosys at
the strike price of Rs 3500 at a premium of Rs .100.if
the market price of Infosys on the day of expiry is more
than Rs 3500 ,the option will be exercised.
An investor buys one European put option on reliance at
the strike price of Rs 300/-,at a premium of Rs 25 /-.if
the market price of reliance ,on the day of expiry is less
than Rs 300,the option can be exercised.

Swap contract
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 contract.
Example:6 months USD LIBOR against 3 months USD LIBOR.
6 month MIFOR against 6 month USD LIBOR