What are derivatives in a simple and accessible language - the ABC of a financier. Derivative financial instruments (derivatives) Derivative financial liabilities

Derivatives have recently been on the front pages of international financial publications due to their direct relationship to scandalous losses and the collapse of a number of organizations. At the same time, they have been successfully traded for centuries, and the global daily turnover on operations with derivatives reaches billions of US dollars. So maybe derivatives trading is only for experienced professional traders? Maybe it's better not to mess with them at all and leave them "highbrow scientists"?

It is true that complex mathematical models are used to value some derivatives, but the basic concepts and principles behind derivatives and derivatives transactions are not that difficult to understand. Derivatives are increasingly used by market participants, including governments, corporate CFOs, dealers and brokers, and individual investors.

The purpose of this book is to provide an understanding of the basic concepts associated with derivatives and the principles of trading these instruments. This section addresses the following questions.

What are derivatives? Why are derivatives needed? Who Uses Derivatives? How are derivatives traded and how are they used?

The examples below will help you understand the meaning of some derivatives.

Example 1

Let's say at the beginning of September you decided to buy a new car. Once you've chosen a make, in your local dealer's showroom, you set the car's exact specifications: color, engine power, steering wheel trim, etc., and most importantly, determine the price. The dealer says that if the order is placed today and a deposit is made, the car will be delivered in three months. What happens to prices in three months, whether a 10% discount is offered or, on the contrary, your model will rise in price, does not matter anymore: the price of the car upon delivery is fixed by an agreement between you and the dealer. A forward contract was concluded - you acquired the right to buy a car in three months and committed to making this purchase.

Example 2

Now imagine walking around the showrooms and discovering that the car of your dreams is on sale for £20,000 but needs to be redeemed today. You do not have such an amount available, and it will take at least a week to arrange a loan. Of course, you can offer the dealer a deposit and enter into a weekly forward contract, but you have other options.

This time you're offering the dealer £100 to just hold the car for you and not change the price for it. At the end of the week, that £100 will go to him whether you buy a car or not. The offer is tempting, and the dealer accepts it. So, an option contract is concluded - in this case it is called a call option. You get the right to buy a car in a week without the obligation to do so.

If you find another dealer within a week offering the same model for £19,500, you simply won't exercise your option. The total cost of the car will now be £19,500 + £100 = £19,600, which is less than the original offer.

If you can't find a better deal and you buy a car from the first dealer, it will cost you £20,100 already. If you refuse to buy a car at all, you will lose the 100 pounds given to the dealer.

In both examples, you are protecting yourself from rising car prices, or in other words, you are hedge. The hedging process is associated with certain risks and rewards, which are listed in the table below,

Example 3

The car you bought a call option on is in high demand, and the price suddenly jumps to £22,000. Your friend also wants to buy such a car. He heard that you have a weekly option to buy this car for 20,000. After visiting the bank, you realize that you can't really afford to buy a car, so you sell your friend an option to buy for £200. So the dealer makes the sale, your buddy gets the car he wanted to buy, and you make £100 selling your option. In this case, you speculate with your contract and make a 100% profit.

Both considered contracts (forward and option) provide for the delivery of the car on a certain future date, and the price of the deposit and the option is determined by the underlying asset - the car.

So what is a derivative? In financial markets, derivatives mean the following.

A derivative is a financial contract between two or more parties that is based on the future value of the underlying asset.

Initially, derivatives were associated with commodities such as rice, tulip bulbs, and wheat. Commodity products are the underlying asset of derivatives today, however, in addition to this, almost any financial indicators or financial instruments can be the underlying asset. So, there are derivatives based on debt instruments, interest rates, stock indices, money market instruments, currencies and even other derivative contracts!

There are currently four main types of derivatives, which are discussed in the following sections of this book:

forward contracts; futures contracts; option contracts; swaps.

Definitions of some derivatives

To help you understand the following summary of derivatives, let's take a look at the definitions of the four main types of derivatives (details related to their valuation, usage, trading strategies, etc. will be covered in the following sections).

A forward contract is a transaction in which the buyer and seller agree to deliver an asset (usually a commodity) of a specified quality and quantity at a specified future date. The price can be negotiated in advance or at the time of delivery.

Example 1 was a forward contract. The terms of the deal were negotiated confidentially with a specific dealer and you made a deposit to secure your obligations.

However, what happens if the machine you ordered is not delivered on time or is not in the correct configuration? You will have to deal with this dealer.

Commodities such as food, metals, oil, are traded on trading floors called exchanges with standard terms and conditions regarding quantity, quality, delivery date, etc. The contracts traded on exchanges are known as futures contracts.

The price of a futures contract is set on the floor of the stock exchange in the process of open shouting by buyers and sellers of their orders and quotes. In modern markets, contract details are also determined electronically in an automated trading system. This means that as soon as the parties conclude a deal, everyone present in the hall receives information about the price paid. Price transparency is one of the main differences between futures contracts and forward contracts, the prices of which are confidential.

A futures contract is a firm agreement between a seller and a buyer to buy and sell a certain asset for a fixed price.

future date. The price of the contract, which changes depending on market conditions, is fixed at the time of the transaction. Because the contract has a standard specification, both parties know exactly what is being traded.

Do you understand this definition? If you have any doubts, write about it in the space left here.

An option contract gives the right, but does not oblige, to buy (call option) or sell (put option) a specific underlying instrument or asset at a specific price - the strike price - on a specific future date - the expiration date - or before it comes. For obtaining such a right, the buyer of the option pays a premium to its seller.

A swap is a simultaneous purchase and sale of the same underlying asset or liability for an equivalent amount, in which the exchange of financial terms provides both parties to the transaction with a certain gain.

A Brief History of Derivatives

The following brief historical outline helps to present the centuries-old development and use of derivatives. For hundreds of years, fortunes have been made and lost in the markets!

1730s - Tulips

In the late 30s of the XVII century, Holland and England were swept by tulip mania - a passion for tulip bulbs. Options on them were traded in Amsterdam already at the beginning of the 17th century, and by the 1930s, forward contracts appeared on the Royal Exchange in England. The enchanting flowering of trade and the rise of profits from transactions in tulip bulbs was followed by an equally crushing market crash and loss of fortunes in 1636-37.

Royal Exchange founded in 1571 to support international trade

Semper Augustus was considered one of the most valuable varieties of tulip. In 1636 there were only two such bulbs in Holland. It is known that for just one of them, some speculator offered 12 acres of land intended for development. The hero of another story is a sailor who brought news to a wealthy merchant who proudly displayed an onion of the Semper Augustus variety on the counter of his shop. The merchant rewarded the sailor for his service with a smoked herring for breakfast. The sailor loved herring with onions and, seeing the "onion" on the counter, he put it in his pocket. When the loss was discovered, the merchant rushed after him, but the sailor had already finished off both the herring and the "onion". His breakfast was worth the annual salary of the entire crew of the ship! For stealing the bulb, the unlucky sailor got off with several months in prison.

1730s - Rice

One of the earliest examples in the history of futures trading comes from the Yodoya Rice Market in Osaka, Japan. Landowners who received rent in kind - part of the rice harvest, were not satisfied with dependence on unpredictable weather, in addition, they constantly needed cash. Therefore, they began to deliver rice for storage to city warehouses and sell warehouse receipts - rice coupons that gave their owner the right to receive a certain amount of rice of a specified quality on a certain future date at a specified price. As a result, landowners received a stable income, and merchants - a guaranteed supply of rice plus the opportunity to profit from the sale of coupons. In an attempt to predict future prices, the successful merchant and pawnbroker Munehisa of the Honma clan began to display price movements graphically in the form of so-called "Japanese candles" and thus laid the foundation for "chartism", or technical analysis.

If the closing price is lower than the opening price, the color of the candle is red or black. If the price is higher at the close than at the open, the candle is empty or white.

Early 19th century Put and call options

Trading puts and calls on stocks was already common practice on the London Stock Exchange at this time, but the process was not without problems. In 1821, passions in connection with the trading of options were very heated. The Exchange Committee has received from a number of its members a demand for "the complete abolition of put and call options, which are now so common that they make up the majority of exchange transactions and clearly infringe on the interests of those who do not agree with such practices."

But there were other members who were more positive about options trading, and the situation worked out in their favor.

New stock exchange. Etching by T. Rowlandson (1756-1827) and A. S. Pugin (1762-1832) from Ackerman's London Microcosm series Guildhall Library, Corporation of London/Bridgeman Art Library, London

The history of modern futures trading can be traced back to the mid-nineteenth century with the development of the Chicago grain trade. In 1848, the Chicago Board of Trade (SWOT) was established, which became a place where buyers and sellers could exchange goods. At first, trade was carried out only in cash goods, and then in goods that “should have arrived,” that is, contracts that provided for the delivery of goods at a specified price on a future date. The first SWOT forward contract on record was dated March 13, 1851, and called for delivery of 3,000 bushels of corn in June. The problem was that the first forward contracts did not have uniform terms, and besides, they were not always executed. In 1865, the SWOT formalized the grain trade by introducing contracts called futures contracts that standardized:

grain quality; the amount of grain; time and place of delivery of grain.

The price of a futures contract was openly set during trading on the exchange floor. It was these early grain futures contracts that formed the basis of commodity and financial futures in use today.

The American Civil War made it possible for the "high-minded scientists" of the time to create derivatives that met the needs of the moment. The Confederate States of America issued bonds with a choice of one of two currencies, which allowed the southern states to borrow funds in pounds sterling and repay the debt in French francs. At the same time, the bondholder had the right to convert the payment into cotton!

On American stock exchanges, trading options for commodities and stocks came into practice by the 60s of the 19th century, and at the very beginning of the 20th century, the Put and Call Brokers and Dealers Association was founded.

1970s Financial futures

Despite the fact that for a long time various states restricted and prohibited trading in futures and options, in 1972 a new division was created at the Chicago Mercantile Exchange (Chicago Mercantile Exchange - CME) - the International Monetary Market (IMM), which became the first specialized an exchange platform for trading financial futures contracts - currency futures. Up to this point, only commodities have been used as the underlying asset of futures. In the same year, SWOT was denied permission to start trading stock futures. In response to the ban, she established the Chicago Board Options Exchange (COE) in 1973. This was the year that Fisher Black and Myron Scholes published their option pricing formula.

By the end of the 1970s, financial futures had gained general acceptance and were traded on stock exchanges around the world.

1980s 20th century swaps and over-the-counter derivatives

Trading on the exchange is carried out by open trading, during which traders shout out their conditions, making them known to everyone present on the exchange floor. However, derivative contracts can also be concluded confidentially, for example, face-to-face, over the phone, using teletype. In this case, they are called over-the-counter (OTC). Although OTC forward and option contracts existed before, it was not until the 1980s that their trading became significant. It was at this time that the role of swaps first became noticeable. Among the first swaps were those that involved the exchange of interest payments on loans, when one party exchanged its fixed interest rate for a floating interest rate held by the other party.

Why derivatives are needed

In the above examples of the use of forward and option contracts, we have already mentioned the risks and rewards that arise for the buyer of a car. Obviously, the dealer, i.e. the seller, is also exposed to a similar risk: the buyer, for example, may not be able to pay for the car.

Derivatives are very important for risk management because they allow you to separate and limit them. Derivatives are used to transfer elements of risk and thus can serve as a form of insurance.

The possibility of transferring risks entails for the parties to the contract the need to identify all the risks associated with it before the contract is signed.

In addition, we should not forget that derivatives are a derivative instrument, so the risks associated with trading them depend on what happens to the underlying asset. Thus, if the settlement price of a derivative is based on the cash price of a commodity that changes daily, then the risks associated with that derivative will also change daily. In other words, risks and positions require continuous monitoring, since both profits and losses can be very significant.

Before continuing to study the material, try to answer the question of who uses derivatives. State your views on who can use forwards, futures, options, and swaps. We do not provide answers to this task, since the next section fully covers the topic.

In our historical essay, some exchanges were mentioned. At the end of the section, we provide a figure that shows the founding dates of the most famous derivatives exchanges in the world.

Royal Exchange, London Baltic Exchange, London London Stock Exchange (LSE) Philadelphia Stock Exchange (PHLX) New York Stock Exchange (NYSE) Chicago Mercantile Exchange (CBT) New York Cotton Exchange (NYCE) New York Mercantile Exchange (NYMEX) ) London Metal Exchange (LME) Tokyo Stock Exchange (TSE) Minneapolis Grain Exchange (MGE) Chicago Mercantile Exchange (CME) Tokyo Grain Exchange Sydney Futures Exchange (SFE) Chicago Options Exchange (COE) Hong Kong Futures Exchange London International Petroleum Exchange (IPE) ) London International Financial Futures and Options Exchange (LIFFE) Singapore International Monetary Exchange (SIMEX) Swedish Options Market, Stockholm (OM) Brazilian Mercantile and Futures Exchange (BM&F) French International Financial Futures Exchange (MATIF) Paris Traded Options Market (MONEP) Swiss Financial Futures and Options Exchange (SOFFEX) Tokyo International Financial Futures Exchange (TIFFE) Financial Futures Market, Ba rselona (MEFF) German Stock Exchange Amsterdam Stock Exchanges - amalgamation of the Amsterdam Stock Exchange (1602) and the European Options Exchange (1978)

The term "derivative" is a typical neologism borrowed from the English language. Derivative means "derived". A derivative is a financial instrument derived from the underlying commodity (asset). The basis can be any product or service.

A derivative establishes a relationship between the parties, the seller and the buyer, based on the future value of the commodity. Derivatives have existed since ancient times. For example, contracts were concluded for the purchase of rice, tulips, etc.

The essence of a derivative is that the buyer receives the right (and sometimes the obligation) to purchase a certain product in the future.

The advantage of a derivative over a direct contract is that the buyer may not immediately think about the delivery and storage of goods. The derivative itself, as a contract, may already be an object for speculation.

The contract is concluded for profit in the future, when the price of the purchased asset changes. Interestingly, the number of derivatives may be greater than the number of assets themselves.

As the most famous financier and investor Warren Buffett said in 2002, derivatives are “a financial weapon of mass destruction”. Experts believe that at least part of the global financial crises is associated with market speculation, when the cost of derivatives significantly exceeds the price of underlying assets.

Types of derivatives

The following types of derivatives are most widely used:

• futures. Futures, or futures contracts, are agreements to buy assets at a price that is fixed on "today". The purchase and sale operation itself is carried out in the future. These types of assets are used only on exchanges;
• forwards. A forward is an analogue of a futures, but it works outside the exchanges. The English word forward means "forward". All terms of the contract are determined directly by the parties, the buyer and the seller;
• options. An option is a derivative that gives the buyer the right to make a transaction subject to the payment of an appropriate fee to the seller. English option means "choice".

Under all three types of contracts, the underlying asset is delivered in the future, but the terms of such delivery are stipulated “here and now”.

Derivative example. Buying a car

To help you better understand what a derivative is, we will give an example. Suppose you went to the dealer's salon and chose the brand of the car. Decided on the color of the body, engine power, retrofitting, fixed the price. Then they made a deposit and signed an agreement to purchase a car in 3 months.

Regardless of the market situation, you will have to buy the car on time and at a predetermined price.

Here's another example. You have looked after a great car, but you can’t buy it now, but you can in a week.

To become the owner of a brand new car, you need to conclude a special agreement with the seller - an option. You, as a buyer, ask the seller not to sell the car until the end of the week and not to increase the price of it. For this you will have to pay, say, 100 dollars. Thus, the right, but not the obligation to make a purchase is fixed. You may well refuse the deal if you find a better price in another salon.

Therefore, if you use derivatives wisely, you can significantly reduce risks and increase profitability on market operations.

Due to its flexibility and multidimensionality, the derivatives market offers the widest opportunities for cost reduction, risk insurance, but it can also cause various crisis phenomena. It is in the uncontrollability of the growth of derivatives volumes that their threatening strength lies. Despite such a dubious reputation, these financial instruments have been attracting interest for a long time. Derivative - what's this? What do they "eat" with?

What does the word derivative mean?

Translated from English, a derivative is a “derivative”. What does this notation mean? A derivative is a derivative financial instrument. In other words, this is an obligation for which you need to deliver the underlying asset underlying the derivative until a certain time. Also, a derivative is a financial instrument for futures transactions, that is, agreements between several parties that preliminarily determine their obligations and rights for the future in relation to underlying assets.

What are stock market derivatives?

Financial derivatives are, by definition, futures and over-the-counter and swap derivatives and swaps themselves.

What are the functions of derivatives?

A derivative is a security that performs certain functions. For example, an important feature is hedging (insurance) the possibility of future price changes for intangible assets (which include stock indices), for goods, for the cost of loans. This is the whole point of derivatives If we talk about hedging a commodity, then derivatives are indispensable regulatory tools that allow producers of goods to hedge against possible future adverse changes in the prices of their product.

Why exactly “derivative” instruments?

Despite the seeming complexity, derivatives are securities with a fairly simple use. They are called derivatives because the formation of prices for derivatives depends on the change in the value of the underlying asset that underlies them. For example, if the price of gold changes, then the price of the derivative for it will also be different. That is why it is always necessary to say to which underlying asset this or that derivative financial instrument belongs.

What are derivative financial instruments (financial derivatives) in simple terms? How does the derivatives market work in 2019?

Market of derivative instruments (derivatives)

If we explain what it is in simple terms, we can say that derivatives are a security for a security. The term is based on the English word derivative, which literally translates as “derivative function”

Derivatives belong to the so-called secondary instruments. Secondary or derivative financial instruments are such types of contracts that are based on an underlying (primary) asset.

Almost any product (oil, precious and non-ferrous metals, agricultural, chemical products), currencies of different countries, common stocks, bonds, stock indices, commodity basket indices and other instruments can become the base of the derivative. There are even derivative securities on another derivative - an option on a future, for example.

That is, derivatives are securities that provide their holder with the right to receive other types of assets after a certain period of time. At the same time, the price and requirements for these financial documents depend on the parameters of the underlying asset.

The derivatives market has much in common with the securities market and they are based on the same principles and rules, although it also has its own characteristics.

In an extremely rare case, the purchase of a derivative security involves the delivery of an actual commodity or other asset. As a rule, all transactions are made in non-cash form using the clearing procedure.

What derivatives are there?

Classification by underlying asset

1. Financial derivatives- contracts based on interest rates on bonds of the USA, Great Britain and other countries.
2. Currency derivative securities- contracts for currency pairs (euro/dollar, dollar/yen and other world currencies). Futures for the dollar/ruble pair are very popular on the Moscow Exchange.
3. Index derivatives- contracts for stock indices such as S&P 500, Nasdaq 100, FTSE 100, and in Russia also futures for stock indices of the Moscow Exchange and RTS.
4. Equity derivatives. MICEX also trades futures for a number of Russian shares of leading companies: LUKOIL, Rostelecom, etc.
5. Commodity derivatives- contracts for energy resources, such as oil. For precious metals - gold, platinum, palladium, silver. For non-ferrous metals - aluminum, nickel. For agricultural products - wheat, soybeans, meat, coffee, cocoa and even orange juice concentrate.

Examples of derivative securities

• futures and forward contracts;
• currency and interest rate swaps;
• options and swaptions;
• contracts for difference and future interest rates;
• warrants;
• depositary receipts;
• convertible bonds;
• credit derivatives.

Features of the derivatives market

Most of the derivatives are not recognized as securities by Russian legal acts. Exceptions include options issued by a joint-stock company and secondary financial instruments based on securities. These include depositary receipts, forward contracts for bonds, stock options.

While primary assets are usually acquired to hold the underlying asset, earn a profit on a subsequent sale, or earn interest, investments in derivatives are made to hedge investment risks.

For example, a farmer insures himself against shortfall in profits by entering into a futures contract in the spring for the supply of grain at a price that suits him. But he will sell the grain in the fall, after the harvest. Automakers hedge their risks by entering into the same agreements to receive non-ferrous metal at a price that suits them, but in the future.

However, investment opportunities of derivatives are not limited to hedging. Their purchase with the aim of selling then with a speculative purpose is one of the most popular strategies on the stock exchange. And, for example, futures, in addition to high profitability, attract with the opportunity, with not the largest investments, to get leverage for a significant amount for free.

However, it should be kept in mind that all speculative transactions with secondary financial instruments are high-risk!

When choosing derivatives as a means of making a profit, an investor should balance his portfolio with more reliable securities with low risk.

Another nuance is that the number of derivative financial instruments may well be much larger than the volume of the underlying asset. Thus, the issuer's shares may be less than the number of futures contracts on them. Moreover, the company issuing the underlying financial instrument may have nothing to do with the creation of derivatives.

What are the advantages of derivatives?

The derivatives market is attractive to investors and has a number of advantages over other financial instruments.

Among the advantages of derivatives as a tool for making a profit, it is worth noting the following:

1. Derivative financial instruments have a relatively low threshold for entering the market and make it possible to start with minimal amounts.
2. The ability to make a profit even in a declining market.
3. The ability to extract more profit and get it faster than from owning shares.
4. Savings on transaction costs. So, for example, an investor does not need to pay for the storage of derivatives, while brokerage commissions for such contracts are also very low and can amount to several rubles.

Conclusion

Derivatives are an interesting and popular investment tool that allows you to make significant profits in a relatively short period of time. However, the rule is fully applicable to them: higher profitability - more risks.

Diversification of the investment portfolio and the inclusion of more stable, but less profitable securities in it, allows you to reduce these risks

Derivative- the basis of the document for the obligation to deliver or receive assets. A financial instrument that depends on the price of one or more securities.

Derivatives are used for futures transactions, risk hedging for profit by financial market players.

Description of the derivative in simple words

Rough example. You have found a company that sells a certain product cheaper than anywhere else, say, for 100 rubles. per kg. You need 10 tons of this product, but at the moment you do not have enough money. You sign papers with this firm that it undertakes to sell you 10 tons of goods at 100 rubles. until the end of the week, and you leave a small prepayment for this. If you have time to find money, then buy the goods at this favorable price, and if you do not have time, the company will sell it to other buyers, and keep your prepayment.

Derivative - information from Wikipedia

The derivatives market is a large segment of the financial system. With their help, investors neutralize risks in the stock markets, share and limit the negative consequences. Derivative financial instruments included in the investment portfolio allow you to reduce losses in case of unsuccessful development of the market situation.

In other words, a derivative is an agreement between the parties by which they are obliged or entitled to transfer assets or funds on or before the due date at a certain cost.

Purpose of purchasing a derivative- hedging price risk over time or receiving income from changes in the value of the underlying asset. But the result can be both positive and negative for the parties to the transaction.

Derivative characteristics:

• the price of a derivative changes following the value of the underlying asset (rate, commodity, security,
• credit rating and other conditions);
• the purchase requires a small initial investment;
• settlements on the derivative occur in the future relative to the moment of creation of the derivative.

Features of derivatives and underlying assets

Derivatives have their own characteristics:

1. urgency - the derivative is valid for a certain period;
2. contractuality - the result of urgent agreements;
3. profit orientation - receiving funds from a change in the price of a derivative.

A feature of a derivative is that the number of derivatives does not have to coincide with the number of underlying assets.

Under the contract, the assets can be different:

• securities;
• products;
• currency, interest rate, inflation;
• official statistics;
• agreements, derivatives of financial instruments and other assets.

Derivative Terms

With the mutual consent of the parties, the terms of the derivative are determined. Contracts are drawn up with the content:

1. name and parties to the contract;
2. contract asset and characteristics - type of security, its price and currency, circulation period and other conditions;
3. execution price, payment procedure and number of underlying assets;
4. type of contract (with or without delivery of the asset), scope of the agreement;
5. the terms of the contract, the responsibility of the parties, disagreements and disputes;
6. addresses, signatures and bank details.

Advantages and disadvantages of using derivatives

The role of derivatives in financial processes is not always clear. On the one hand, derivatives redistribute risks and reduce the costs of financial intermediation. But, on the other hand, derivatives pose significant threats.

Benefits include various conditions.

Flexibility. With you can come to an agreement and make a deal with different options that are not traded on the stock exchange.

Securization. Securities are replacing bank loans, creating suitable competitive conditions. That is, there is a replacement of some assets for others, this allows the bank to spread the risk and attract more investors.

Cost reduction. The costs of financial transactions are reduced, the volume of investments is minimized, and the risk of a possible loss is reduced.

Small amounts of initial capital can bring both profit and loss. Investors are taking on huge probabilities of losing money.

Of the disadvantages of derivatives, conditions are noted.

Failure to fulfill obligations under the contract. Unlike settlements with securities (transaction assets are prepaid), such a situation is impossible in the derivatives market.

No protection for OTC derivatives. Derivatives are not protected by law. Laws classify transactions with derivatives as bets that are not subject to judicial protection.

Hiding profits. Derivatives are often used to evade taxes and carry over balance sheet results from one quarter to another.

Futures- an agreement on the sale and purchase of the underlying asset at the cost at the time of execution of the agreement. The sale or purchase takes place in the future at a certain time. Futures work on exchanges.

Forward- non-standard contract, over-the-counter equivalent. Purchase and sale and conditions are determined between the buyer and the seller.

Option- the buyer has the right to execute the purchase and sale transaction, provided that he pays the seller a fee.

With the proper use of derivatives, you can reduce risks and increase profits.