In the banking industry, there are several types of derivatives. Here are some of the most common ones:
- Futures: Futures contracts are agreements between two parties to buy or sell an underlying asset (such as commodities, currencies, or financial instruments) at a future date and at a pre-determined price. Futures are traded on exchanges and are standardized in terms of contract size, expiry date, and delivery terms.
- Forwards: Forwards are similar to futures contracts, but they are not standardized and are traded over the counter (OTC). Forwards are customized contracts between two parties that agree to buy or sell an underlying asset at a specified price and date in the future.
- Options: Options contracts are agreements that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a pre-determined price and date. Options can be either call options (the right to buy) or put options (the right to sell). Options are traded on exchanges and over the counter.
- Swaps: Swaps are agreements between two parties to exchange cash flows based on different financial instruments or indexes. The most common types of swaps are interest rate swaps and currency swaps.
- Credit derivatives: Credit derivatives are contracts that allow investors to trade the credit risk of a particular issuer or asset. Credit default swaps (CDS) are the most common type of credit derivative.
- Equity derivatives: Equity derivatives are contracts that allow investors to trade the price movement of an underlying stock or stock index. Common equity derivatives include options and futures on individual stocks and stock indexes.
Overall, derivatives are useful financial instruments for hedging risks, speculating on price movements, and managing exposures. However, derivatives can also be complex and risky, and their use requires expertise and understanding of the underlying financial instruments and market conditions.