Derivative Contracts Derivative Contracts Derivative financial trades are gaining prominence in trading. A derivative trade is one whose value depends on another instrument's value. We are going to look at Forward Contracts, Options, and Products . In a normal contract, usually referred to as a spot contract, the delivery date is as close as possible to the trade date.
Forward contracts are agreements to do the delivery sometime in the future.
For example, consider a French company that wants to buy a commodity from an American company in two months. The company, usually, would do financing in francs. So, it enters into a forward contract exchange rate deal, paying an agreed amount of francs for the required dollars. The price would be offered by the bank who is carrying out the deal based on the market's perception of where the exchange rate is likely to go in the next two months. Such a deal is said to have a tenor of two months.