Types of derivatives

♤ Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's preagreed price.

♤ Futures: 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, such as futures of the Nifty index.

♤ Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options:

o "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 dates.

o "Puts' give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date.

♤ Warrants: Options generally have lives of up to one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called Warrants and are generally traded over-the-counter.