What are derivatives? A derivative is, as it is understood in the financial markets, is a financial instrument or a security, whose value is determined by the underlying, And these underlying assets may take the form of equity, commodities including metallurgical products, treasury, foreign exchange bills or real estate. For instance a gold futures contract can be cited as a perfect example of a derivative and its value would depend on the price of gold, its underlying, at a given point of time. The same is case with equity.

Types of Derivatives

There are two types of derivatives viz., commodity and financial. The derivative of commodity were the first ones to emerge in the USA in the nineteenth century in the form of futures in the realm of grain trade. The origin of the practice of pricing of different commodities, what is commonly known as forward pricing could be traced back to earlier times. It was only in 1865 that the Chicago Board of Trade introduced formal futures trading for a few commodities in the light of dramatic rise and fall in the prices of grain and cotton. And the CBOT became the agency where these derivatives could be negotiated. In 1919 Chicago Butter and Egg Board came into being which was just an offshoot of CBOT and subsequently changed its name into Chicago Mercantile Exchange (CME). These are the two largest and principal futures exchanges.

There is another type of derivatives which are come under the nomenclature of financial derivatives viz., Foreign Currency Futures, Equity Options, T Bond Futures, Currency Swaps, Interest Rate Swaps, T-Note Futures, Eurodollar Futures, Equity Index Futures, Options on T-Bond Futures, Eurodollar options, Credit default Options, Equity Index Swaps, Differential Swaps and so forth.

Thus it can be observed that derivatives which made a humble debut in the form of commodities futures have evolved into a most sophisticated financial product with new form s and novel features.