Derivative contracts are generally classified in four categories such as Forward, Futures, Options and Swaps.

A Forward contract is a customized contract between two entities where settlement takes place on a specific date in the future at today’s pre-agreed price. It is in contrast to the spot contract which is an agreement to buy and sell an asset on the same date.

A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Exchanges specifies certain standardized features to the futures contracts so that everyone  has a similar product to trade and each day it has to be marked to market. The two parties in contract do not know each other; the exchange provides confidence to the parties that the contract will be honoured.

Options are of two types – Calls and Puts .

Call give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

Put give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date. Buyers of the options have to pay a premium to the option seller to avail this facility or right. Seller of the option gets the premium in lieu to take the risk of uncertainty.