What are the different types of Derivatives?

Last Updated: 2 Sep 2025

Derivative value depends on the assets such as stocks, commodities, currency or indexes. These contracts are mostly applied in hedging, speculative trading, and to increase portfolio diversification.

Knowing the different types of derivatives is essential for investors and traders to make more returns. This blog discusses some of the most significant derivatives and their importance in the modern financial landscape.

Types of Derivatives:

There are four types of financial derivatives that are listed below:

1. Options

An option contract is a contract wherein the buyer attains the right to trade the underlying asset over a predetermined period. The price that both parties determine is known as the strike price, and the seller of the option is called the option writer. 

However, the buyers are not obliged to exercise the option for trading in such assets. If they don’t want to exercise the options contract, they can just pass on the exercise right after paying the premium to the option’s writer.

2. Futures

Futures contract is a standardised legal agreement between the buyer and the seller of the underlying asset. Under a futures contract, a predetermined quantity and price are agreed upon, payable at a specific future date. Unlike Options, the parties in a futures contract are legally bound to exercise the contract. This contract remains legal until the time of expiry of the contract. While derivatives and their types can be traded either over-the-counter or through an exchange, futures are standardised and are always traded via the exchange, making them credit-risk free.

3. Forwards

Forward contracts are similar to futures as they also come with an obligation to execute the contract. However, unlike futures, forwards are traded over-the-counter instead of through an exchange. Forwards also offer the contracting parties the option to customise the contract as per their requirements.

4. Swaps

Swap derivatives comes under the over-the-counter contracts (OTC). It enables parties to swap their financial obligations or liabilities, among which interest rate swaps are the most common. The cash flows within this contract are based on a rate of interest, and while one cash flow is generally fixed, the other is susceptible to change as per a benchmark interest rate.

How To Trade In The Derivatives Market

The most important thing to understand before you begin investing in different financial derivatives is the market itself. It is wise to thoroughly educate yourself regarding the current market conditions and the factors likely to impact them.

Each financial market is dependent upon factors that include economic, political and social factors. Any of these affecting factors is enough to cause a significant shift in the market. Hence, you must be aware of these developments and prepare for them in advance.

Here is how you can trade in derivatives effectively:

• You need to create an online trading account before you can begin trading in different types of derivatives. However, if you are using the services of a broker for trading in derivatives, you can place your orders over the phone or even online.
• When you start trading in derivatives and their types, you are required to pay a margin amount, which you cannot withdraw until the contract is executed and the trade has been settled. If, while trading, your margin amount falls below the minimum acceptable amount, you will get a margin call to rebalance it.
• Make sure to thoroughly understand everything about the underlying asset. Keep your budget in mind and ensure that it is adequate for meeting the financial requirements of the margin for trading, cash in hand, and covering the prices of the contracts.
• While you are investing in online trading app, you should remain invested in the contract until the trade has been settled.

Examples of Derivatives

Derivatives can be used for various purposes, including hedging and speculative trading. In this aspect, here are some examples of derivatives such as futures, options, swaps and forwards.

• Futures Contracts: A jeweller confirms a futures contract to purchase gold at ₹1,00,000 per 10 grams in two months. If the market prices rise to ₹1,10,000 per 10 grams, then the jeweller will save ₹10,000 through this contract.
• Options Contracts: An investor buys a call option to purchase Company A shares at ₹2,500, which will expire in one month. If the stock rises to ₹2,700, they can still buy at the initial price and profit.
• Swaps Contracts: An Indian household goods manufacturing company with a ₹1 crore loan at a fixed 9% interest swaps payments with a bank that offers floating MCLR + 1.5%. In this situation, the firm expects the interest rate to fall and benefit from potential lower floating rates.
• Forward Contracts: If an airline signs a forward contract to buy jet fuel at a fixed price in six months. Then, this agreement will protect the buyer from fluctuating prices.

Conclusion

Derivatives are a great financial instrument for experienced investors who want to diversify and invest their surplus funds into generating good profits. Furthermore, derivative contracts are also an ideal investment method for hedgers who are extremely risk-averse. However, as derivative trading can be complex, it is wise to gain market knowledge and learn about the obligations that come with derivative trading.

Frequently Asked Questions

1. What are the 4 types of derivatives?

The four main types of derivatives are Futures, Options, Swaps, and Forwards. Futures and forwards are agreements to purchase and sell assets at a selected price, while options give rights but not obligations. Meanwhile, swaps entail the interchange of cash flows among the parties to cope with interest rate or currency risks.

2. Why are swap contracts the complicated ones?

Swap contracts are complicated due to their personalisation and structure. They generally involve several cash flows over time. Understanding their valuation, counterparty risks, and terms such as fixed vs. variable rates requires expert knowledge, which places them outside the reach of less experienced individuals compared with standardised derivatives like futures or options.

3. How do you trade derivatives?

Derivatives are traded on exchanges like the NSE, BSE, or over-the-counter (OTC). The trader must open a brokerage account, fulfil the margin requirements, and select contracts according to their strategy. Derivative trading involves analysing market trends, managing leverage, and ensuring timely settlement to capitalise on price movements effectively.

4. What are Nifty derivatives?

Nifty derivatives are financial contracts based on the Nifty 50 Index, representing the top 50 companies on the NSE. This includes nifty futures and options, in which traders speculate on or hedge against index movements to obtain exposure to India’s broader equity market.