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Guilherme Mazui

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What is the Difference Between Derivatives and Futures?

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Derivatives and futures are both types of financial contracts that derive their value from underlying assets, but they have some key differences:

  1. Scope: Derivatives are broader in scope, involving various techniques, while futures contracts are narrower in scope and focus on a specific asset or commodity.
  2. Nature of the contract: Derivatives can be customized to expire on any date, while futures contracts have a standardized expiration date.
  3. Obligation: Options, a type of derivative, give the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract. In contrast, a futures contract obligates the buyer to purchase a specific asset at a predetermined price and date.
  4. Exchange: Futures contracts take place on an organized exchange, ensuring a level of security and standardization. Forward contracts, another type of derivative, are private agreements between parties and are not traded on an exchange.

In summary, derivatives, including options, provide flexibility and choice for buyers, while futures contracts require a commitment to buy or sell an asset at a predetermined price and date. Both types of contracts aim to mitigate the risk of future transactions, but they function differently and have distinct characteristics.

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  • What is the Difference Between Derivatives and Futures?
  • Comparative Table: Derivatives vs Futures

    • Comparative Table: Derivatives vs Futures

    Derivatives and futures are both financial contracts that involve the exchange of an asset at a specific price and time. However, there are key differences between the two. Here's a table comparing the main differences between derivatives and futures:

    Feature Derivatives Futures
    Definition Derivatives are securitized contracts whose value is dependent upon one or more underlying assets. Futures are a type of derivative that obligates two parties to buy or sell an asset at a predetermined price on or before a specified date.
    Usage Derivatives are used for risk management, speculation, and leveraging a position. Futures are used to hedge against price movements and for speculation.
    Types Common types of derivatives include futures contracts, options contracts, and credit default swaps. One primary type of futures contract, available for periods of one, two, and three months.
    Standardization Derivatives can be customized to meet the needs of a diverse range of market participants. Futures contracts are standardized, with set terms and an expiration date.
    Trading Derivatives can be traded over-the-counter (OTC) or on exchanges. Futures are traded on exchanges and have standardized terms, making them easier to trade.
    Regulation Derivatives like forward contracts have less oversight and may carry more counterparty risk. Futures are regulated by authorities like the Commodity Futures Trading Commission (CFTC), reducing counterparty risk.

    In summary, derivatives are a broader category of financial contracts that rely on underlying assets for their value, while futures are a specific type of derivative that obligates parties to buy or sell an asset at a predetermined price. Futures are standardized and traded on exchanges, while derivatives can be customized and traded OTC or on exchanges.

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    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.