Exchange contracts come in a pre-decided format, pre-decided sizes and have pre-decided expirations. Hence, these contracts are of standard nature and the agreement cannot be modified in any way. This means that the exchange is an intermediary. However, futures contracts are listed on the exchange. The similarity lies in the fact that futures contracts also mandate the sale of commodity at a future data but at a price which is decided in the present.

Type 2: Futures ContractsĪ futures contract is very similar to a forwards contract. The details of the forward contracts are privileged information for both the parties involved and they do not have any compulsion to release this information in the public domain. Another point that needs to be noticed is that if these contracts have to be reversed before their expiration, the terms may not be favorable since each party has one and only option i.e. Also, before the internet age, finding an interested counterparty was a difficult proposition. Hence, there is an increase chance of counterparty credit risk. This means that the exchange is not an intermediary to these transactions. However, a forward contract takes place between two counterparties. The price at which this transaction will take place is decided in the present. A forward contract is nothing but an agreement to sell something at a future date.

Also, they are the oldest form of derivatives. In this article, we will list down and explain those 4 types: Type 1: Forward Contractsįorward contracts are the simplest form of derivatives that are available today. These four categories are what we call the 4 basic types of derivative contracts. However, these variations can all be traced back to one of the four categories. True, that there are hundreds of variations in the market. This may make it seem like a difficult and confusing task to deal with derivatives. There are hundreds or even thousands of types of contracts that are available in the market. Today, if a new person wants to buy a derivative contract, they will be bewildered at the sheer amount of choice that they will have at their disposal.

In the previous articles we discussed about what derivative contracts are and what are the uses of such contracts? However, one important point needs to be noticed.

Basic financial derevatives