Derivatives are financial instruments (or contracts) whose value is determined by the value of an underlying item. They have no intrinsic value but derive their value over time from the performance of assets such as commodities, stocks or bonds, interest rates, exchange rates, or indices such as a stock market index or consumer price index.

They differ from stocks in that they do not signify ownership of an asset but are agreements for a future price on the asset. The current price of an asset is determined by the market demand for and supply of the asset. However, the future price of the asset is not known - the price may increase, decrease, or remain the same a week or a month into the future. Buyers and sellers make a contract for future trading at a specified price. This contract is called a derivative.

The three main types of derivatives are:

- Futures

- Options

- Swaps

Futures are contracts to buy or sell a certain asset at a certain date in the future for a predetermined price. The contract holder or buyer will gain if the prices go up or suffer losses if the prices go down. TradingCharts.com (at http://futures.tradingcharts.com/marketquotes/) provides current commodity futures quotes.

An option is a contract between a buyer and a seller. The buyer has the right but not the obligation to buy the asset within a specified time at a predetermined price. The seller has the obligation to honor the contract. Option Trading Tips (at http://www.optiontradingtips.com/) provides detailed information and tips for option trading.

Futures and options are quite similar, but in a futures trade the buyer has an obligation to buy the asset at the rate specified and the date on the contract. Both parties of a futures contract must fulfill the contract on the settlement date. An option is just a right and may or may not be exercised.

A swap is a contract between two parties, called counterparties, who agree to exchange cash flows over a period of time. Swaps are used to provide protection against future changes in exchange rates and interest rates, eliminate interest-rate risks arising from normal commercial operations, and reduce financing costs. Swaps are another risk management tool, along with currency forwards, futures, and options.