Types of Derivatives

Types of Derivatives

Here are some of the types of derivatives that are commonly traded in the Treasury market:

Futures: Treasury futures are contracts that obligate the buyer to purchase a specified Treasury security at a predetermined price and time in the future. Futures contracts are traded on exchanges and are standardized in terms of the underlying security, contract size, and delivery date. They can be used to hedge against interest rate risk or to speculate on future interest rate movements.

Options: Treasury options are contracts that give the buyer the right, but not the obligation, to buy or sell a specified Treasury security at a predetermined price and time in the future. Options contracts are traded on exchanges and can be used to hedge against interest rate risk or to speculate on future interest rate movements.

Swaps: Treasury swaps are agreements between two parties to exchange cash flows based on different interest rates. For example, a fixed-for-floating swap might involve one party paying a fixed interest rate to another party in exchange for receiving a floating interest rate. Swaps can be used to manage interest rate risk or to speculate on interest rate movements.

Caps and floors: Caps and floors are options on interest rates that provide protection against interest rate movements above or below a certain level. Caps provide a ceiling on interest rates, while floors provide a floor. They can be used to manage interest rate risk or to speculate on interest rate movements.

Swaptions: A swaption is an option on a swap. It gives the buyer the right, but not the obligation, to enter into a swap at a predetermined price and time in the future. Swaptions can be used to hedge against interest rate risk or to speculate on interest rate movements.

Treasury bond futures options: Treasury bond futures options are options contracts that give the buyer the right, but not the obligation, to buy or sell a Treasury bond futures contract at a predetermined price and time in the future. They can be used to hedge against interest rate risk or to speculate on future interest rate movements.

The types of Derivatives depend on the types of underlying assets. The derivatives may be based on physical commodities such as agriculture products, metals etc. In India, futures contracts in commodities are available at different commodities exchange. The following are the types of derivative depending upon their objective of investment:

• Commodity Derivatives and Financial Derivatives
• Exchange Traded and OTC Derivatives

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