Types Of Derivatives English

Different Types Of Derivatives

The main types of derivatives include futures contracts, which obligate the exchange of assets at a future date; options, granting the right to buy or sell at a set price; swaps, exchanging cash flows or assets; and forwards, customized contracts traded over-the-counter.

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What Is The Meaning Of Derivative?

A derivative is a financial contract whose value is derived from an underlying asset, index, or security. Its price depends on fluctuations in the underlying entity. Common examples include futures, options, and swaps, used for hedging risks or speculative trading in various markets.

Derivatives are complex financial instruments used in various markets, like stocks, commodities, currencies, and interest rates. They derive their value from the performance of an underlying asset, allowing investors to speculate on or hedge against future price movements.

The most common types of derivatives are futures, options, and swaps. Futures contracts involve buying or selling an asset at a predetermined future date and price. Options give the right, not obligation, to buy or sell at a specified price. Swaps involve exchanging cash flows or other financial instruments.

For Example: If you buy a futures contract for 1 kg of gold at Rs. 50,000, and expect the prices to rise. If the market price reaches Rs. 55,000, you profit by Rs. 5,000; if it falls, you incur losses.