The term derivative refers to a type of financial contract whose value/structure is derived from some other asset.
It is dependent on an underlying asset, group of assets, or benchmark. A derivative is set between two or more parties that can trade on an exchange or over-the-counter (OTC).
CASH Price/ SPOT Priece
The price of underlying asset is reffered as cash price or spot price.
P&L
The change in the value of an investment or a financial position is reffered as P&L
Types of derivatives
Forward and Futures
These are the contracts that lock in the price two parties will buy and sell an asset at some future date.
Options
Options are similar to forwards, but one party has the right not to participate at the time the contract expires.
Swaps
Swaps are linked to intrest rates, allowing a floting intrest rate to be switched to a fixed rate.
Market of derivative
Derivative are traded on either OTC( over the counter) or an organised exchange. OTC contracts are bilateral deals between two parties, there is always a risk that one of them could fail to meet their contractual obligations.
Organised exchange which trade derivatives are New york exchange, Chicago Mercantile Exchange , and Euronext for example.
Exchnage traded Product are standarised and there is a high degree of price transparency. Also, Exchange traded product have much less exposure to counterparty risk ( default risk).
Details
Forward
Forward contract is an agreement between a seller and a buyer in which they agreed that seller will sell an asset to the buyer at a certain time in the future at a price agreed upon at a time entering the contract.