Today’s blog post is on the different type of derivatives. In the previous article, we spoke about what is a derivative, and it’s Important.
Therefore, derivatives consist mainly comprised of three kinds,
- First – Forward Derivative Contract
- Second – Future Derivative Contract
- Third – Option Derivative Contract
Let’s look at these three variants in more specificity.
Let’s start by talking about Concerning Forward Derivative Contract.
1. Forward Derivative Contract – TYPE OF DERIVATIVES
If you are talking about forwarding Derivative Contract, its English definition states that
Forwards are a custom-designed contract that is created Today between Buyer and Seller To facilitate transactions that are likely to be a reality in the near future.
Example:
Forward is a contract between a person between seller and buyer, where the transaction will take place on an upcoming date,
For instance, the case where a farmer cultivating grains enters into a deal or deal with the grain broker to sell his crop, the farmer will then sell the product to the marketer in the near future and the price will be determined in the present and at the exact price, the farmer will earn his cash. Will sell the merchandise to the merchant
This is an example of a forward contract.
A contract like this will allow the farmer has the advantage of having signed a contract the farmer will be able to earn money in the form of selling his grain to the trader who will purchase the grain in the near future at the price which will be set by the contract. However, low the market price can be.
on The other side,
The grain trader will enjoy the benefit of being able to receive his grain for a set rate. due to the fact that he believes that the cost of grain could decline in the near future.
This is the way that, typically when two parties, buyers and sellers, are of opposing opinions in a futures contract. Then they could gain money by executing forward contracts.
That’s the reason why people had forward contracts in the past times.
2. Future Derivative Contract –TYPE OF DERIVATIVES
The simple futures contract is the newest version of the forwarding contract which is designed to address the issues that are posed by the futures contract. If we look at the definition of it, a futures contract isn’t an individual contract, but a standard one between the seller and buyer. The actual transaction that is part of the futures contract will occur in the near future.
The unique characteristic of a futures contract is that it –
- The contract must be standard which means that it must be the same for each with the same regulations.
- The contract is listed on a marketplace (stock exchange) from where anyone is able to purchase, sell, or buy
- Exchange is a guarantor for the purpose of ensuring that neither party is in default.
- In the entire time within the terms of the contract, it may be transferred to someone other than the contract.
When we speak of stocks, then the principal value that is the subject of the forward contract may be a share of an index, a company, Nifty, Bank Nifty or in the case for commodities metals, such as silver, gold or in the case for the currency market, it could comprise USD or INR.
We will explore this in greater detail in the next installment in our Derivative Type Series.
Option Derivative Contract – TYPE OF DERIVATIVES
The option derivative contract is precisely a future derivative that gives us the option of dealing with an upcoming date in accordance with the contract however, there isn’t any obligation. that is, it’s not required to make that deal.
If we earn the profit from the futures contract, then we could make money through the execution or settlement of the contract.
However, if we don’t get any profits from the contract, then we won’t do it. contract. It provides this type or option i.e. option contract.
That’s why the title the contract has is an option contract.
As an option contract is a type of futures contract which we own the right. which means that we can conclude the deal at our discretion, however, should we not wish to, then there is no requirement to us that the deal will be settled. simply have to close.
This way we have the freedom to choose whether we would like to negotiate or not to trade.
An option gives Choice: Choose the option of selling or buying an upcoming contract. Also, the option of obligation.
And, as I said the underlying asset of a future could be a stock, an index, or commodity as the primary asset in options derivative contracts may also be a share, index, or commodity.
