Submitted To Submitted By:-

Mr. Amit Kumar Neha

Deepak
Harish
Mohit
Krishan
 The derivatives market is the financial
market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms
of assets.
 The term derivative stands for a contract whose price is
derived from or is dependent upon an underlying assets.
 The underlying assets could be a financial assets such as
currency, stock & Market index, an interest bearing
security or a physical commodity.
 The market can be divided into two, that for exchange-
traded derivatives and that for over-the-counter
derivatives. The legal nature of these products is very
different, as well as the way they are traded, though many
market participants are active in both.
Participants in a derivative market can be
segregated into four sets based on their trading
motives.
 Hedgers
 Speculators
 Margin Traders
 Arbitrageurs
Derivative contracts are of several types. The most common types are forwards, futures, options and swap.
 Forward Contracts: A forward contract is an agreement between two parties – a buyer and a seller to purchase or sell
something at a later date at a price agreed upon today. Forward contracts, sometimes called forward commitments , are very
common in everyone life. Any type of contractual agreement that calls for the future purchase of a good or service at a price
agreed upon today and without the right of cancellation is a forward contract.
 Future Contracts: A futures contract is an agreement between two parties – a buyer and a seller – to buy or sell something
at a future date. The contact trades on a futures exchange and is subject to a daily settlement procedure. Future contracts
evolved out of forward contracts and possess many of the same characteristics. Unlike forward contracts, futures contracts
trade on organized exchanges, called future markets. Future contacts also differ from forward contacts in that they are
subject to a daily settlement procedure. In the daily settlement, investors who incur losses pay them every day to investors
who make profits.
 Options Contracts: Options are of two types – calls and puts. Calls give the buyer the right but not the obligation to buy
a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but
not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
 Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged
formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are interest rate swaps and
currency swaps.
o Interest rate swaps: These involve swapping only the interest related cash flows between the parties in the same currency.
o Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one
direction being in a different currency than those in the opposite direction.
 A forward contract is a customized contract between two
parties to buy or sell an asset at a specified price on a
future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes
it particularly apt for hedging. Unlike
standard futures contracts, a forward contract can be
customized to any commodity, amount and delivery date.
A forward contract settlement can occur on a cash or
delivery basis. Forward contracts do not trade on a
centralized exchange and are therefore regarded as over-
the-counter (OTC) instruments. While their OTC nature
makes it easier to customize terms, the lack of a
centralized clearinghouse also gives rise to a higher
degree of default risk. As a result, forward contracts are
not as easily available to the retail investor as futures
contracts.
 A futures contract is a legal agreement to buy or
sell a particular commodity or asset at a
predetermined price at a specified time in the
future. Futures contracts are standardized for
quality and quantity to facilitate trading on
a futures exchange. The buyer of a futures
contract is taking on the obligation to buy the
underlying asset when the futures contract
expires. The seller of the futures contract is
taking on the obligation to provide the
underlying asset at the expiration date.
A forward contract is a contract whose terms are tailor-made i.e. negotiated
between buyer and seller. It is a contract in which two parties trade in the
underlying asset at an agreed price at a certain time in future. It is not exactly
same as a futures contract, which is a standardized form of the forward
contract. A futures contract is an agreement between parties to buy or sell
the underlying financial asset at a specified rate and time in future
While a futures contract is traded in an exchange, the forward contract is
traded in OTC, i.e. over the counter between two financial institutions or
between a financial institution or client.
As in both the two types of contract the delivery of the asset takes place at a
predetermined time in future, these are commonly misconstrued by the
people. But if you dig a bit deeper, you will find that these two contracts
differ in many grounds. So, here in this article, we are providing you all the
necessary differences between forward and futures contract so that you can
have a better understanding about these two.
Basis Forward Contract
Meaning Forward Contract is an
agreement between parties
to buy and sell the
underlying asset at a
specified date and agreed
rate in future.
What is it? It is a tailor made contract.
Traded on Over the counter, i.e. there is Organized stock
no secondary market.
Settlement On maturity date.
Risk High
Default As they are private
agreement, the chances of
default are relatively high.
Future Contract
A contract in which the
parties agree to
exchange the asset for
cash at a fixed price and
at a future specified
date, is known as future
contract.
It is a standardized
contract.
exchange.
On a daily basis.
Low
No such probability.