Derivative Market

A derivative market are based upon another underlying market which includes stock market, stock indices and currency market .A financial market which is a derivative market or financial instrument just like future contracts or option that can be derived from other forms of assets.

Underlying assets in derivatives

a. Precious metals like gold and silver
b. Foreign exchange rate of currency
c. Bonds of various types including long and short term negotiable debt
d. Over the counter(OTC) money market products such as loan or deposits

 Classification of derivatives

a. Forward Contract - A forward contract or “specific delivery contract” occurs between buyer and seller where long position holder (buyer) agrees to buy an underlying asset in future with a certain price. Forward contracts are traded over-the-counter and are not allowed to deal with exchange. As this contracts are bilateral contract. Forward contracts are very popular in foreign exchange market.

b. Future Contracts - An agreement between two parties of buying and selling of an asset with a specific quantity, time and place. These contracts allow trading in exchanges which defines certain standardized norms for future contracts.

c. Option Contracts - Option contracts are those contracts which give the right but not the authority to buy and sell the asset before its specified time or date. Option can be traded in various instruments commodities, financial asset, stock index petroleum products, metals etc

d. Swap Contracts - An agreement over a predefined interval of time between two parties to exchange assets. These are generally customized transactions and are helpful in problem of price fluctuation forex market.

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