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Banking Term: Derivative

Jan 16, 2015 11:06 IST

    Derivative is considered as security whose price is dependent upon or derived from one or more underlying assets.

    Types of Derivatives

    Forward Contract

    A forward contract is an agreement between two parties to buy or sell an agreed amount of a commodity or financial instrument at an agreed price, for delivery on an agreed future date. Future Contract- Is a standardized exchange tradable forward contract executed at an exchange.

    Options

    An option is a contract which grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate (exercise price) on or before an agreed date (expiry or settlement date).

    Swaps

    Swap is an agreement to exchange future cash flow at pre-specified Intervals. Typically one cash flow is based on a variable price and other on affixed one.

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