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Derivatives – Meaning, Types, Advantages,
Disadvantages, Check derivatives
meaning and derivatives market Information, In this
article you can find complete details for Derivatives like –
Meaning of Derivatives, Various Types of Derivatives,
Advantages of Derivatives, Disadvantages of Derivatives
etc. Now check more details from below..
Derivatives Meaning
A financial instrument whose value is derived from the
value of one or more underlying things like commodities,
precious metals, currency and bonds etc., since the value
of these is linked to various other securities in the market,
they are considered as highly risky.
Examples:    Options, futures and swaps
How do they work?
VRP Ltd is a company engaged in making sweets on large
scale having operations across all the major cities in India.
Most of the materials they use in their regular operations
are jiggery, sugar, edible oil, cashewnut etc.,

The prices of these items are continuously changed
depending upon various factors such as production of
sugarcane, cashewnut etc., So in order to manage the risk
of higher prices VRP ltd enters into agreement with those
who produce sugar and other items as needed by them to
purchase certain amount of materials at certain agreed
prices at a point of time. In future if the prices of these
items go above than the prices agreed in the contract then
VRP ltd will get benefit in terms of the differences between
the current market price and agreed price. Here the value
of the contract is a dependent of various commodities.
Let’s understand some of the financial derivatives:

1. Options:
These are the binding contracts between the parties to
buy or sell a particular security, commodity, metal etc., at
a given price. Options give the right to buy to the buyer
and does not bring any obligation. An option to buy certain
security at certain price is a “call option” and the other one
which gives the right to sell a security is “put option”.
2. Futures:
It is a derivative where two parties enter into a contract to
buy or sell a security or any property at certain agreed
price for a “future delivery”. There will be an agreement to
buy or sell a specified quantity securities or any

commodities y in a designated future month at a price
agreed upon by the buyer and seller. They facilitate the
trading on future exchange.
3. Forward contracts:
Most of the difference between forwards and futures lies in
terms of liquidity, trading platform and settlement. Forward
contracts are customized bilateral contracts between two
parties where settlement takes place in future on a specific
date at a price agreed today. They are less liquid than
futures.
4. Swaps:
They are the agreements between the parties to exchange
the financial instruments or the resulted future cash flows
in future based on agreed criteria such as rate of interest,
stock indices etc.

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