Derivatives is a generic term used to describe futures, options, swaps and various other similar transactions. Apart from interest swaps, most derivative contracts are contracts for differences – the difference between the agreed future price of an asset on a future date and the actual market price on that date.
A futures contract is a contract under which one party agrees to deliver to the other party on a specified future date (the “maturity date”) a specified asset at a price (the “strike price”) agreed at the time of the contract and payable on the maturity date. The term “forward contract” is often used in relation to private contracts not transacted through an organised exchange.
The asset may be a commodity or currency or a debt or equity security (or a number or basket of securities), or a deposit of money by way of loan, or any other category of property.
The effect is to guarantee or “hedge” the price. The hedging party protects himself against a loss but also loses the chance to make a profit.
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