DERIVATIVE
A derivative is a financial instrument that offers a return based on the return of some other underlying asset.
EXCHANGE TRADED CONTRACTS
have standard terms and features and are traded on an organized deivative trading facility usually referred to as a future exchange or an option exchange.
OVER THE COUNTER CONTRACTS
are any transactions created by two parties anywhere else.
TWO CATEGORIES
1) FORWARD COMMITMENTS
It is an agreement between two parties in which one party agrees to buy and the other agrees to sell an asset at a future date at a price agreed on today.
Exchange traded (Futures)
Over the counter (Swaps,forward contracts)
2) CONTINGENT CLAIMS
It is derivative contract with a payoff dependent on the occurrence of - future event.
Exchange traded (Warrants,interest rate options)
Over the counter (Warrants,interest rate options)
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