Types of Derivative Contracts | Tutorweb3

Types of Derivative Contract

Different Types of Derivative

Types of derivatives - I talked to you in a previous post on derivatives series - What is a derivative and what is its significance?


And let's know in today's post - about the type of derivatives.

So, there are mainly three types of derivatives:


  1. Forward Derivative Contract
  2. Future Derivative Contract
  3. Option Derivative Contract


Let us understand these three derivatives in little detail.


First, let's talk about the Forward Derivative Contract.


1. FORWARD DERIVATIVE CONTRACT


If we talk about the Forward Derivative Contract, then its English definition says that:


Forward A Custom Agreement Made Today Between Buyer And Seller For The Transaction Which Will Happen In Future.


namely -


Forward is a personal contract between the buyer and seller, the contract in which the real TRANSACTION is to take place in the future someday.


For example, if a farmer growing a grain makes a contract or agreement with a grain trader that the farmer will sell the goods in the future to the grain merchant, whose price will be fixed today, and at the same price, who will get that Will sell the merchandise to that merchant. This is an example of a forward-looking contract.


In such a contract, the farmer will benefit that if he contracts, then according to the contract, he will be able to get money from that by selling his grain to that grain merchant in the future, according to the contract. No matter how low the price in the market.


the other side...


The benefit of the grain businessman will be that he will get the grain at a fixed price because he thinks that the price of grain in the future may be reduced.


In this way, often when two people, buyer, and seller are considering the opposite of a future deal. So they can make a profit by doing such forward contract. And so people used to do forward contracts in the olden days.


2. FUTURE DERIVATIVE CONTRACT


The simple future contract is the next version of the forward contract, which is designed to solve the problems coming into the future contract, if it talks about its definition, then the future contract is also an individual rather than a standard contract between Buyer and Seller. Happens, and in this contract, the real TRANSACTION is going to happen someday in the future,


The special thing about the future contract is that -


  • The contract should be standardized, meaning equal for everyone, pre-determined uniform rules.
  • The contract is listed on a market (stock exchange), from which anyone can buy, sell.
  • The exchange should be a guarantor so that no party defaults.
  • Within the entire time period of the contract, the contract can be transferred to someone else.


If the underlying asset of a future contract can be a stock of a company, when it comes to the stock market, the index can be USD and INR in the case of Nifty, Bank Nifty or Gold, Silver, Metal, and Currency in the case of commodity market.


We will discuss this in detail in a subsequent post on the types of derivatives series.


3. OPTION DERIVATIVE CONTRACT


An option derivative contract is also a futures derivative contract, in which we have the right to deal with debt in the future according to the contract, but do not have an obligation. that is, it is not necessary that we have to do that deal.


If we are benefiting from that future contract, then we can earn profit by executing or re-setting that contract.


But if we are not going to get any loss or loss in that contract, then we will not do that contract. It gives such an option i.e. option contract. And that's why the name of this contract is an option contract


Because an option contract is a kind of future contract, in which we have a right. If we want, we can execute the deal, but if we do not, then there is no obligation on us to settle the deal or Have to complete it.

 

In this way, the option gives us the choice, whether we want to deal or if we do not deal.


The option offers a choice = choose the right to buy or sell a future contract. And also the choice of commitment.


And just as I said that the underlying asset of future can be stock, index, commodity, or currency, similarly the underlying asset of option derivative contract can also be stock, index, commodity, or currency.


And will know about it in an upcoming post in detail.

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