On a derivative exchange, the products traded derive their value from underlying issues like bonds, bankers' acceptances, dollar, stocks, indices and commodities. The most common derivative products are options and futures contracts. An exchange-traded derivative market is a unique central market where prices are usually determined by supply and demand. All bids and offers are executed without prearrangements, allowing all market participants equal opportunity to trade. As a regulated market, all transactions are guaranteed by a clearing corporation.
Documentation is standardized, and both buyer and seller assume counterparty risk.
Futures markets were created in America to suit the needs of farmers who wanted to lock in the future price of their crop depending on certain risks like weather. In contracting an agreement on a future price, the farmers were assured of a certain profit or limit their loss. As this notion took root and evolved, more and more diversified products were created including non-agricultural contracts. With these contracts, the same hedging techniques used in the agricultural sector were extended to financial sector. Today, the prices we pay for goods and services depend greatly on how successful companies are managing their risks.