What are derivatives?

Derivatives are financial instruments that derive value from an underlying asset. The underlying asset can be equity, fixed income security, currency or commodity. There are several types of derivatives including forwards, futures, options, swaps and warrants. Forwards refers to contracts between two parties over-the-counter wherein there is no exchange insurance. Futures are a contract to exchange obligations on a future date. Options are one category of derivatives and give the holder the right, but not the obligation to buy or sell the underlying asset. Swaps are customized contracts traded in the over-the-counter (OTC) market privately. Longer-dated options are called warrants and are traded over-the-counter.