What are the Futures and Options

For this Futures and options have initially first we have to understand what is the derivatives.

Derivatives are instruments whose value depends on value of the underlying asset. What do you mean by the above mentioned statement? Let’s take an example of an orange juice. The value of an orange juice depends on the value of the underlying asset orange. Hence orange juice can be termed as a derivative of orange.Like that the value of derivatives that we are going to discuss here will rely on the value of underlying asset. Here the underlying asset can be commodities (wheat, rice, oil seeds etc), metals, currency, stocks.basically derivatives in finance parlance can be classified into four headings.


There are TWO Types of contracts:

Forwards Contracts:
Futures contracts:


1) Forward contract: it is nothing but an aggrement between two parties to buy a product in future date whose price is determined by the present.

Generally everyone in this world are scared about uncertainties due to inflation, monsoons etc which leads to price raise.So the buyer agrees to buy the product at a future date at a price determined today with the risk minimizing attitude of if price goes very high I am safe that I can buy with the determined price. If price goes very high the buyer is benefited and if it falls the seller is benefited. This generally happens in agricultural commodities because of unpredictability of monsoons.IN Later days lot of people started to take a backseat when loss comes to them. So people thought about other ways of solving this problem. Here came futures and options.


Future contracts


This is same as forward contracts but here we have two differences.

1. It takes place with the presence of third party (the exchange)
2. It is just a notional commitment between the parties