Futures, forwards, Options, Swap

Forwards
· negotiated privately in the OTC market, customized,
· do not have any margin requirements
· do expose the parties to credit risk.
· Have uniqure contract, have default risk.
· Require no cash transaction until delivery date, usually not regulated

Futures
· Standardized
· exchange-traded contracts that are more liquid and so cheaper than forwards.
· Futures buyers and sellers must deposit a margin with the exchange/clearing house.
· Futures have near-zero credit risk. Regulated.

Options
Contracts that give their owners the right, but not the obligation, to conduct a transaction in the future, whose terms are set in the option contract.

Call option - provide the holder the right (but not the obligation) to purchase an underlying asset at a specified price (the strike price), for a certain period of time.

Put option - give the holder the right to sell an underlying asset at a specified price (the strike price).

Swaps
· Contracts for the exchange of two or more sets of cash flows between two parties.