What does Derivative Mean? A security whose price is dependent upon or derived from one or more underlying assets.

The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes Types of Derivatives. In broad terms, there are two groups of derivative contracts, which are distinguished by the way they are traded in the market: Common derivative contract types Some of the common variants of derivative contracts are as follows: Forwards:A contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.It is not traded in standard stock exchange.No downpayment is required to pay in the time of agreement. Intermediary such as bank and financial institutions act as a mediator.
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Example: Suppose that Bob wants to buy a house a year from now. At the same time, suppose that Andy currently owns a Rs100,000 house that he wishes to sell a year from now. Both parties could enter into a forward contract with each other. Suppose that they both agree on the sale price in one year's time of Rs104,000 (more below on why the sale price should be this amount). Andy and Bob have entered into a forward contract. Bob, because he is buying the underlying, is said to have entered a long forward contract. Conversely, Andy will have the short forward contract. At the end of one year, suppose that the current market valuation of Andy's house is Rs110,000. Then, because Andy is obliged to sell to Bob for only Rs104,000, Bob will make a profit of Rs6,000. To see why this is so, one needs only to recognize that Bob can buy from Andy for Rs104,000 and immediately sell to the market for Rs110,000. Bob has made the difference in profit. In contrast, Andy has made a potential loss of Rs6,000, and an actual profit of Rs4,000.

Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in the manner that
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while the former is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold, the latter is a non-standardized contract written by the parties themselves. The period of the contract may vary between 3 to 21 months. Depending on the underlying assets they may be commodity, financial futures, and stock indices future. 3.Options :In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.[1] The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, acurrency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset. An option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. The reference price at which the underlying asset may be traded is called the strike price or exercise price. Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter. 4. Swap : Swap is a comdination of forward contract by two counter parties. It is an average to reap the benefit arising out of fluctuation of price in the market
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Swaps can basically be categorized into two types: Interest Rate Swap: These basically necessitate swapping only interest associated cash flows in the same currency, between two parties. Currency swap: In this kind of swapping,the cash flow between the two parties includes both, principal and interest. Also the money which is being swapped is in different currency for both parties.