Types of Derivatives

The 4 main types of derivatives are futures, options, forwards, and swaps. Each derivative gets its value from an underlying asset, index, rate, currency, commodity, or another financial reference.

• Futures create obligations for both parties.
• Options give buyers contractual rights.
• Forwards are agreements between 2 parties.
• Swaps exchange agreed future cash flows.
• Derivative types carry different risk profiles.
• Leverage can increase gains and losses.

The types of derivatives also differ in standardisation, settlement, liquidity, and counterparty exposure. Understanding these differences helps you assess what you may gain, lose, or be required to pay under a contract.

Derivatives are financial contracts whose value depends on an underlying asset or financial reference. The underlying can include shares, stock indices, commodities, currencies, interest rates, or debt instruments.

For example, an equity index futures contract changes in value when its underlying index moves. The derivative is a separate contract, so you do not need to own every share represented by that index.

Different types of derivatives create different rights and obligations. A futures contract binds both sides to its terms, while an option gives its buyer a contractual right.

Derivatives can be used to manage an existing financial exposure, take a view on price movements, or capture price differences between related markets. However, derivatives can also create losses larger than the amount initially deposited.

The 4 main types of derivatives are futures, options, forwards, and swaps. They differ mainly in standardisation, contractual obligations, trading structure, and settlement.

1. Futures contracts

A futures contract is a standardised agreement to buy or sell an underlying asset under predetermined terms at a future date.

Both parties have contractual obligations. The contract specifies details such as the underlying asset, quantity or lot size, expiry, and settlement mechanism.

Futures use margin. This means your economic exposure can be larger than the money initially deposited.

Among the main types of derivatives, futures are useful when standardised exchange contracts are required. Their leverage also means adverse price movements can create significant losses.

2. Options contracts

An option gives its buyer the right, but not the obligation, to buy or sell an underlying asset according to predetermined terms.

A call option gives you the right to buy. A put option gives you the right to sell. You pay a premium when buying an option.

In options trading, the option buyer can lose the entire premium paid if the position expires without value. The risk of an option seller depends on the position and contract.

This makes options different from other types of derivatives. The buyer receives a contractual right rather than the same two-sided obligation found in a futures contract.

3. Forward contracts

A forward contract is an agreement between 2 parties to buy or sell an asset at a future date on terms decided in advance.

Forward contracts can be customised for quantity, price, date, and settlement terms. This differs from futures contracts, which use standardised exchange specifications.

A forward contract can also expose you to counterparty risk. One party may face a loss if the other party fails to meet its contractual obligation.

Among the types of derivatives, forwards can suit situations where 2 parties need contract terms that do not match standardised exchange contracts.

4. Swap contracts

A swap is a derivative contract in which 2 parties exchange specified cash flows according to agreed terms.

An interest-rate swap can involve cash flows calculated using different interest-rate bases. A currency swap can involve payments or principal amounts denominated in different currencies.

Unlike exchange-traded futures and options, the swap examples discussed here are over-the-counter contracts. Their terms depend on the agreement between the counterparties.

The main consideration with these types of derivatives is that changing one financial exposure can introduce another risk, including counterparty or liquidity risk.

Types of derivatives can also be grouped according to the asset or financial reference that determines their value. This classification is separate from whether the contract is a future, option, forward, or swap.

Equity derivatives

Equity derivatives derive their value from shares or equity indices. They can be used to manage equity price exposure or take a position on market movements.

Commodity derivatives

Commodity derivatives derive their value from commodities such as gold, crude oil, metals, or agricultural products. Businesses can use these contracts to manage exposure to commodity price movements.

Currency derivatives

Currency derivatives derive their value from exchange rates. A business with foreign-currency receipts or payments may use an eligible derivative to manage exchange-rate exposure.

Interest-rate derivatives

Interest-rate derivatives depend on interest rates, debt instruments, or specified rate benchmarks. They can be used to alter or manage an existing interest-rate exposure.

A derivative can therefore fall into 2 classifications at once. For example, an index future is both a futures contract and an equity derivative.

Different types of derivatives can be used for hedging, directional positions, arbitrage, and price discovery. The purpose depends on the underlying exposure and contract structure.

Hedging: A derivative can offset part of an existing financial exposure. For example, a business with a foreign-currency payment can use an eligible currency derivative to reduce the effect of an adverse exchange-rate movement.

Directional position: You can take a derivatives position based on an expected movement in an underlying asset. If the market moves in the opposite direction, the position can result in a loss.

Arbitrage: A market participant can take offsetting positions when related instruments are available at different prices. Transaction costs and execution conditions affect the final result.

Price discovery: Derivative prices can reflect market expectations about the underlying asset, time to expiry, interest rates, and other contract variables.

Derivatives are not always necessary. If your objective is direct ownership of a share for the long term, buying the share in the cash market is a different route. A derivative contract does not provide the same ownership rights as directly holding equity.

Exchange-traded derivatives in India operate through recognised stock exchanges, brokers, and clearing corporations under the applicable securities-market framework.

A trading account with the relevant derivatives segment enabled is required to place exchange-traded Futures and Options (F&O) orders. Income proof is required for trading in the derivatives segment.

Before placing an order, you should check the contract specifications. These can include the underlying asset, lot size, expiry, strike price for options, margin requirement, premium, and settlement method.

A practical process is:

1. Complete the required Know Your Customer (KYC) requirements.
2. Enable the relevant F&O segment in your trading account.
3. Provide the required income proof for derivatives trading.
4. Select the underlying and derivative contract.
5. Check the current lot size, expiry, margin, or option premium.
6. Place the order through your trading platform.
7. Monitor margin requirements, price movements, expiry, and settlement.

The National Stock Exchange of India (NSE) currently provides contract specifications for equity, commodity, currency, and interest-rate derivatives. NSE Clearing acts as the legal counterparty for deals executed in NSE's F&O segment.

For OTC derivatives, the regulatory framework depends on the product and participants. Reserve Bank of India (RBI) directions cover specified OTC derivatives and margin requirements for non-centrally cleared OTC derivative contracts.

RBI's Market-makers in OTC Derivatives Directions, issued on 16 September 2021, came into force on 3 January 2022. RBI's Margining for Non-Centrally Cleared OTC Derivatives Directions were issued on 8 May 2024 and came into force on 8 November 2024.

When comparing futures and options, do not assume every contract follows the same margin, expiry, or settlement structure. Check the applicable exchange specifications before trading.

Sources:

• Securities and Exchange Board of India (SEBI) 
• National Stock Exchange of India (NSE) 
• Reserve Bank of India (RBI)

Last updated: 22 October 2026.

Understanding the types of derivatives starts with the obligation created by each contract. Futures and forwards create commitments for both parties, while an option buyer receives a contractual right. Swaps exchange agreed cash flows. You should also compare leverage, liquidity, margin or premium, settlement, expiry, and counterparty exposure. These factors matter more than the amount paid upfront when judging the financial risk of a derivative position.