What Are Derivatives And Futures Options?

Derivative trading is a type of investment that you can make at the Indian Stock Exchange. It is a contract between two parties wherein the value is predetermined by fluctuations in the underlying asset.
Derivatives may be created for a share or a material object. The commonly used underlying assets include stocks, commodities, bonds, market indexes, interest rates and currencies. Derivatives may also be based on weather data, such as the amount of rains or the number of sunny days in a particular region or area.
Derivatives may be of several different types:
?? Stock Futures/Forwards
?? Swaps
?? Options
Futures: This is a type of derivative investment/financial contract wherein two parties agree to transact a set of financial instruments/ physical commodities for future delivery at a particular price
Swaps: This is a type of derivative investment/financial contract which is a contract to exchange cash either ON or BEFORE a specified future date. This is based on the underlying value of currency rates, bonds/interest rates, commodities exchange, stocks or any other asset. Another term that is associated with a swap is 'swaption' which is an option on the forward swap. These can either be 1) a receiver swaption 2) a payer swaption.
Options: These are part of a class of securities called derivatives. They are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. There are two different types of options: 1) Call Option 2) Put Option
Derivatives are basically 'call options' which is a stock option where a buyer has the right (not an obligation) to buy for example, 100 shares at a pre-determined price. Here the value of the option depends on what the underlying stock is. Farmers, for example are responsible for a lot of derivate's in the country. They often want to 'lock-in' prices for their crops in order to protect their harvest and to calculate the profits that they could make for each season. Here, they work with 'brokers' or companies to sell these future contracts on commodities exchanges.
Derivatives can be classified into two different groups:
These derivatives are categorized based on:
They can be categorized as 'lock' or 'option' products. While 'lock' products, such as futures, swaps or forwards obligate both the contractual parties to abiding to the terms over the term of the contract; 'option' products such as interest rate caps give the buyer the right (not obligation) to enter into the contract under the specified terms.
There are several uses while investing in derivatives such as:
The advantages of derivative trading are:
However, the disadvantages of derivative trading include:

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