6.4 Types of derivatives: futures, forwards, options and swaps

Futures Contracts: Futures contracts are standardized agreements to buy or sell an underlying asset at a predetermined price and future date. These contracts are traded on organized exchanges, and the terms, including contract size, expiration date, and settlement method, are standardized. Futures contracts are typically used for hedging or speculating on price movements of commodities, currencies, stock indices, and interest rates.
Forward Contracts: Forward contracts are similar to futures contracts but are privately negotiated between two parties. Unlike futures contracts, forward contracts are not standardized and have customized terms to meet the specific needs of the involved parties. Forward contracts are commonly used for managing price risk, especially in the commodities market, where participants agree to buy or sell an asset at a future date and at a price agreed upon today.
Options Contracts: Options contracts provide the buyer with the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) within a specified period (expiration date). Options are traded on exchanges and provide flexibility for investors to speculate on price movements, hedge against risk, or generate income through option writing. Options are available for various assets, including stocks, commodities, currencies, and indices.
Swaps: Swaps are agreements between two parties to exchange cash flows or liabilities based on specified terms. There are several types of swaps, including interest rate swaps, currency swaps, commodity swaps, and equity swaps. Swaps are customized contracts tailored to meet specific needs, such as managing interest rate risk, currency exchange risk, or obtaining exposure to different assets. Unlike futures or options, swaps are not traded on exchanges but are typically privately negotiated over-the-counter (OTC).