Derivatives contracts are financial instruments that derive their value from an underlying asset, such as stocks, bonds, commodities, or currencies. They have become a popular tool for hedging and speculation, as they allow investors to take advantage of price movements in the underlying asset without actually owning it. While derivatives can be used for many different purposes, it is important to understand the different types of derivatives contracts available in order to make informed decisions.

The most common type of derivative is the futures contract. A futures contract is an agreement between two parties to buy or sell a certain asset at a predetermined price on a specified date in the future. Futures are used to hedge against price fluctuations in the underlying asset, as well as for speculation. For example, an investor might purchase a futures contract on gold in order to protect themselves against a decline in the price of gold.

Options are another type of derivative contract. An option gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price. Options are often used to hedge against price movements in the underlying asset. For example, an investor might purchase a call option on a stock in order to protect themselves against a potential increase in the stock's price.

Swaps are another type of derivative contract. A swap is an agreement between two parties to exchange cash flows at predetermined intervals. Swaps are often used to hedge against interest rate or currency fluctuations. For example, an investor might enter into a swap agreement with a counterparty to exchange fixed interest payments for floating interest payments in order to protect themselves against a potential rise in interest rates.

Finally, there are also credit default swaps (CDS). A CDS is a type of derivative contract that provides protection against the default of a debt issuer. The buyer of the CDS makes periodic payments to the seller in exchange for protection against the default of the debt issuer. For example, an investor might purchase a CDS on a bond issued by a company in order to protect themselves against the risk of the company defaulting on its debt obligations.

In conclusion, derivatives are powerful financial instruments that can be used for hedging and speculation. Understanding the different types of derivatives contracts available is essential for investors who want to make informed decisions. By understanding the different types of derivatives contracts, investors can use them to protect themselves against price movements in the underlying asset, as well as to speculate on price movements in the underlying asset.