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The term “Derivatives” indicates that it has no independent value that is its value is entirely “derived” from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, or anything else. In other words, derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.

The four main types of derivatives traded today are:

Forward Contracts:
A Forward contract is a transaction in which the buyer and the seller agree upon the delivery of a specified quality (if commodity) and quantity of underlying asset at a predetermined rate on a specified future date.
Futures Contracts:
A Future is a firm contractual agreement between a buyer and seller for a specified asset on a fixed date in the future. The contract price will vary according to the market place but it is fixed when the trade is made. The contract also has a standard specification so both parties know exactly what is being traded.
Options Contracts:
An Options contract confers the right, but not the obligation to buy (call) or sell (put) a specific underlying instrument or asset at a specific price – up until or on a specific future date – the expiry date.
Swap transactions:
A Swap transaction is the simultaneous buying and selling of a similar underlying asset or obligation of equivalent capital amount where the exchange of financial arrangement with more favourable conditions that they would otherwise expect.

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