Common forms of Derivatives - Future and Option

Future and option are the two terms which represents the most important forms of derivatives. The derivatives are the instruments used in finance that gains value driven from an underlying. These underlying are the various things like the stock of a corporate, gold or currency. The derivatives are most common in the commodity market. Thus we can say that the futures andoptions are analyzed mostly in commodity trading division and can be done independently of the assets. The derivative instrument value is totally dependent on the change of the underlying asset value. There are basically two types of derivatives namely Exchange traded and OTC better known as Over the Counter.

Future is basically known as the contract used for buying or selling the underlying asset products with a specific price at a pre assured time. All future contracts have four general features termed as Buyer, Seller, Price and Expiry.  The most commonly used asset products on which one can get a future contract are indices, equity stocks, currency and commodity. One should make a note that sometimes a physical asset can fetch you more profit than the future contract.

Option can be termed as the instrumental contracts that give the privilege to the shareholder to either sell or buy the underlying asset at a predefined fixed cost. There are two factors to define option namely a call option or a put option. Call option is associated with buying and put option is the right of the buyer to sell the asset.