II.   Instruments & Transactions

A Derivative is a formal Instrument issued under the Corporate Securities standards of instruments and writing first formed under the Westminster laws of Great Britain from the 19th Century as a type of negotiable contract which derives its value as an unexecuted Right to obtain or enforce some underlying Asset such as a Promissory Note, Debenture, Stock, Bond or other form of Property. 

The four most common forms of Derivatives are Futures, Forwards, Options and Swaps:

(i) A Future is a contract between two parties negotiated through a third party exchange (futures exchange) whereby A (“the Buyer” or “long”) agrees to buy an Asset from B (“the Seller” or “short”) for a price agreed upon today (“future price”) with delivery and payment occurring at a specified future date (“delivery date”) on condition that both parties deposit a performance bond of cash (“margin”), permitting daily calculation on such contracts, with any short fall on performance bond (“margin call”) replenished and the settlement of the market value (“spot value”) on delivery date; and

(ii) A Forward is a contract between two parties negotiated privately whereby A (“the Buyer” or “long”) agrees to buy an Asset from B (“the Seller” or “short”) for a price agreed upon today (“future price”) with delivery and payment occurring at a specified future date (“delivery date”) with any additional settlement/payment required (“profit/loss”); and

(iii) An Option is a contract between two parties whereby A (“the Buyer”) purchases the Right, but not the obligation to buy or sell an underlying Asset from B (“the Seller”) at a specified price on or before a specified date. An option which conveys to the owner the right to buy something at a specific price is referred to as a call; an option which conveys the right of the owner to sell something at a specific price is referred to as a put; and

(iv) A Swap is a contract between two counterparties to exchange the Rights or Benefits to some underlying Asset each party has separately in their possession or control. The Asset may include a wide variety of choices, but most commonly is classified into interest rate swaps, currency swaps, commodity swaps and credit default swaps.