A forward contract is a customized contract between two entities, where settlement takes place as a specific date in the future at predetermined price.
Ex: On 10th Novem, Ram enters into an agreement to buy 100 kgs of wheat on 1st May at Rs.10000 from Shyam, a farmer. It is a case of a forward contract where Ram has to pay Rs.10000 on 1st May to Shyam and Shyam has to supply 100 kgs of wheat. Ram has taken a long position assuming the price of the wheat will rise in the future six months .
A financial contract obligating the buyer to purchase an asset, (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange.
Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.
i) Interest Rate Swaps: - A interest rate swap entails swapping only the interest related cash flows between the parties in the same currency. ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and after a specified period of time, to give back the original amount swapped.
Options… The owner of the option has option to sell or buy assets at a given price on or before given date . Options Put Option Call Option A right to sell the underlying assets , not a obligation A right to buy the underlying assets , not a obligation
American Option An option that may be exercised on any trading day on or before expiry . European Option An option that may only be exercised on expiry date