Before looking at the instruments themselves we need to be aware of some key distinctions between types of derivative.
A first important distinction is between exchange traded derivatives and off-exchange (over-the-counter or OTC) derivatives.
Exchange traded contracts have standardised specifications in terms of contract specifications, the way they are traded and the way they are administered. Their prices are widely quoted and they are more likely to be liquid.
Off exchange contracts are individually negotiated contracts, which may deal in non–standardised sizes, or be a structured product specifically designed for a particular purpose. The fact that they are tailor-made means that they are not as widely quoted or as liquid.
Next, in terms of what types of derivative are available, are the assets contracts are available on. These include:
Within these asset classes, a range of derivative instrument are available. Here we will look briefly at the three types of contract you are most likely to come across as a private investor; namely, futures contracts, forwards and options.
