Futures, options, swaps, and forwards compared
| Derivative | Definition | Key Feature |
|---|---|---|
| Futures | Obligation to buy/sell at a set price and date | Standardized, exchange-traded, margin required |
| Options | Right (not obligation) to buy/sell | Pay premium upfront, limited downside for buyer |
| Swaps | Exchange of cash flows between parties | OTC, customized, used by institutions |
| Forwards | Like futures but OTC and customized | Counterparty risk, no exchange guarantee |
The $600 trillion notional derivatives market
The global derivatives market is estimated at over $600 trillion in notional value. It dwarfs the stock and bond markets combined. Most of it is interest rate swaps used by banks and corporations to manage risk.
See real options data for any ticker
Check the Options section for any ticker to see real derivative data in action.
Why the instrument is neutral, the user decides
The core function: transferring risk
What's the core function of derivatives markets in the financial system?
Check your understanding
Sit with the ideas.
A company has $20 million in floating-rate bank debt at SOFR + 1.0%. They enter an interest rate swap where they pay 4.2% fixed and receive SOFR. What is their effective all-in borrowing cost after the swap?
Why: