Financial derivative

Forwards, futures, options and swaps are common derivatives. They can transfer or reshape financial exposures, but can also create speculation or leverage when used without a matching underlying need. Different instruments impose different obligations: an option buyer has a right, while an ordinary forward binds both parties. Contract size, maturity, settlement, collateral and counterparty terms matter. A hedge's effectiveness depends on how closely the derivative matches the exposure. A low initial cash payment does not mean the potential loss or future liquidity requirement is small.