Forward ContractĪ forward contract is where a buyer agrees to purchase the underlying asset from the seller at a specific price on a specific date. Learn more about options in the Fundamentals of Options article. ![]() ![]() With a forward contract, the buyer and seller are obligated to make the transaction on the specified date, whereas with options, the buyer has the choice to execute their option and buy the asset at the specified price. OptionsĪn options contract gives the buyer the right, but not the obligation, to buy or sell something at a specific price on or before a specific date. There are generally considered to be 4 types of derivatives: forward, futures, swaps, and options. In simpler terms, think of putting down a bet on a hand of blackjack as the underlying and then someone else making a bet on the success of your blackjack hand as a derivative of the underlying. The value of a derivative is linked to the value of the underlying asset. What Are Derivatives?Ī derivative is a financial instrument that derives its value from something else. In this article, we’ll cover the basics of what each of these is. ![]() In finance, there are four basic types of derivatives: forward contracts, futures, swaps, and options.
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