A derivative is a a security, like an option or asset, whose value is subject to change due to adjustments in the underlying variables on which is it based. Forex derivatives typically include currencies, commodities, bonds and equities.
There are several types of derivatives: forwards, futures, and options.
Forwards: A contract where a transaction takes place in the future, on a predetermined date with proices based on current market values. This is usually between two entities. Clearly, you run the risk of losing money, but also increasing your investment.
Futures: Again, a contract between entities to buy/sell at a certain point in the future, again at a certain price. It sounds the same as a forward transaction, right? That’s because it is closely related. A futures transaction however are standardized.
Options: A contract that give you the opportunity, without obligation, to buy or sell an underlying at a stated date with a stated price.
The purchase and sale of forex derivatives can be a risky venture for the novice. Fluctuating market changes may result in a loss, however prudent study of the trends of the market may result in an asset increase. The pulchase and sale of derivates are often considered advanced Forex trading skills.
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