A Derivative is when something has no value by itself. Its value completely depends of the value of the underlying asset. In this case, the underlying asset could be any security. Examples would be currency, stocks, and commodities. In this case, a derivation can be explained as a pre determined contract like a future or an option. These derivatives are always connected to a securities asset or specific real.
A Futures Contract
A Futures Contract is a legal document and agreement to buy or sell a curtain security on a future pre-decided date. Future contracts are best when it comes to organization of the dates in the future and the delivery time. The expiration date of the contract is pre decided. When a future expires, it will be finished with cash or with whatever the underlying security was. When it is settled with cash, everything is finished and there are no more obligations.
An Option contract
An Options Contract is also know as a type of derivative. The option contract gives the one that holds the contract the right of purchasing and selling whatever security is concerned at a pre-decided price at a specific period of time. It is know as the premium when the holder first purchases this right, or the option. The seller of the option contract is required to settle the option however it is written in the contract when the holder mentions his right. Securities or an index of the prices of securities can both be the underlying securities when talking about an option contract.
There are two types of options. They are called a call option and a put option. A call option provides the purchaser with the right to buy a security on a date in the future at a pre-decided price. A put option provides the purchaser with the right to sell a security on a date in the future at a pre-decided price. The future price is known as the “strike” price.