Financial Derivatives

Today, business has spreaded at international level. Due to this, all type of businesses are living in the risk due to changing foreign exchange rates and international interest rates. So, from saving from these type of risk, business  owners do the contract each other in which financial products are bought and sold at future date at fixed price. Such contracts are called financial derivatives.


Financial derivative may be in all type of businesses and in all type of market. Financial derivatives may be in retail market, metal market, share market, bond market and mutual fund market.

Financial Derivative Products 

This is new type of financial product or instrument. Financial derivative may be forward contract, future contract, option or swap.

First Financial Derivative : Forward Contract 

Forward contract is that financial derivative in which product is sold or bought at future date at today's agreed price.

Second Financial Derivative : Future Contract 

Future contract is that type of financial derivative in which asset is bought or sold at a certain time in future at certain price. It must be in standardized exchange market

Third Financial Derivative : Option

An option is also contract in which asset is bought or sold on the basis of option of buy and option of sell. Right to buy is call option and right to sell is put option. This option may be on agreed price.

Fourth Financial Derivative : Swap

Swap is exchange of one liability with other liability. It may be interest rate swap and currency swap.

Following are main reasons of its existence

1. Connecting local market with international market.

2. Changing in the asset prices in financial market at large level.

3. Increasing of risk.

4. For hedging the risk.

5. For stability in prices of different commodities.