Introduction

Derivatives are financial instruments used to manage one's exposure to today's volatile markets. A derivative product's value depends upon and is derived from an underlying instrument, such as commodity prices, interest rates, indices, and share prices.

Futures and options are essentially elementary derivative products mostly traded on exchanges. A futures contract is an agreement between two parties to buy or sell the underlying instrument at a specific time in the future for a specific price determined today.

An option however, provides the holder/buyer the right, but not the obligation, to purchase or sell a certain quantity of the underlying instrument at a stipulated price within a specific time period by paying a premium.

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