Futures and options contracts are perhaps the most common examples of derivatives in the marketplace. When two parties enter into a futures contract they agree to buy and sell a specific commodity (or its financial equivalent) at a specific date in the future. An options contract works much the same way, except that the party who purchases the contract is not obligated to execute on it when the day comes.
The value of this contract is based on the price of the underlying asset (whichever commodity they have decided to trade) but not defined by that price. The parties will also price their contract based on how each evaluates the market, how much they need the given commodity and what they think will happen to prices over time, among other concerns.
The value of this contract is based on the price of the underlying asset (whichever commodity they have decided to trade) but not defined by that price. The parties will also price their contract based on how each evaluates the market, how much they need the given commodity and what they think will happen to prices over time, among other concerns.
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