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A futures contract has many similarities to a forward contract. The similarity lies in the fact that it also involves the sale of an asset or commodity at a future date; the price of this contract is also pre-decided. However, there are many differences between the two.

A futures contract is a standardized contract listed on the exchange. Since the exchange is a party to the futures contract, the terms of the contract cannot be modified, and the risk element is limited.

In order to further minimize the risk, all the parties are required to maintain the daily margin requirement at all times.

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As the futures contract is traded on the exchange, they are mandated to follow a daily settlement process, which means that any profit/loss realized on a contract on a particular day will have to be settled on that very date itself. This is the most effective way to limit counterparty risk.

The major point of difference between the two is that both the parties do not need to enter into an agreement with each other, but rather with the exchange.

This is the third most important kind of derivatives contract that is popular amongst the traders. Unlike the forward and futures contracts, there is an obligation between parties to discharge a contract at a future date. Options, on the other hand, gives one of the parties a right to buy/sell the underlying assets but there is no compulsion or obligation.

The other party is bound by an obligation to carry out the trade. Options can be traded in the exchange-traded markets, as well as, the over-the-counter markets. Since one party has the privilege to make a choice to buy/sell, it has to pay a privilege or premium to the other party.

Options can be of two types: call and put. Call options give the right but not the compulsion to purchase something at a future date, which is pre-decided. On the other hand, the put option allows you the right but not compulsion to sell something at a pre-determined rate.

A swap is a rather complex kind of derivative in the market. As the name suggests, Swap allows the parties to exchange their stream of cash flows. You can say that an uncertain stream of cash flow can be exchanged for a more certain one.

Two of the most popular types of Swaps are ‘Interest Rate Swaps’ and ‘Currency Swaps.’ It is a prevalent practice to exchange a fixed rate interest for a floating one.

These derivatives are traded between financial institutions and not retail investors. Investment bankers sometimes act as intermediaries to these contracts. Swaps are known to be exposed to a great extent of exchange rate risk.