Introduction: Derivatives Options - a contract that gives buyer the right (not obligation) to purchase or sell something at a later time. Forward/Futures contract is a agreement between two parties to purchase or sell something at a later date at a price agreed on today. Swaps - an agreement to exchange cash flows.

Futures Types Agriculture futures Metallurgical futures Interest Bearing futures Foreign Currency futures Stock Index futures

Functions of Derivatives Price Discovery - there is information of futures price reveals future spot price or for options - implied volatility Risk-transfer: hedging. Derivatives can reduce the total portfolio risk when used appropriately. Reduction in transaction cost and complete the market Bypassing market impediments (such as short-selling)