Derivatives are financial instruments that derive their value from an underlying asset, such as a stock, commodity, currency, or interest rate. There are several types of derivatives, each with its own characteristics and uses. The most common types of derivatives are forwards, futures, options, and swaps. A forward contract is a customized agreement between two parties to buy or sell an underlying asset at a specified price and date in the future. A futures contract is similar to a forward contract, but it is traded on an exchange and is standardized. An option is a contract that gives the holder the right to buy or sell an underlying asset at a specified price and date. A swap is an agreement between two parties to exchange cash flows based on a specified underlying asset or index.