The main distinction between derivatives and other financial instruments is that you only lay out a portion of the value of the underlying asset but you can benefit from all of this asset's price fluctuation. The 'something' speculated upon can be a real commodity, such as a mineral or agricultural product, including things as diverse as oil, soya beans, wheat, live hogs, pork bellies, shrimps, cheddar cheese or the orange juice of the film Trading Places. It is the latter which feature in the Barings affair. This market in share, or equity, derivatives has developed rapidly since around 1987, as an offshoot of the derivatives markets in foreign exchange and interest rate products which took off as a form of speculative investment in the 1980s. A futures contract is an agreement traded on a specialised exchange for the future delivery of a certain quantity of a commodity or financial instrument at a price set at the time of contract.
Most futures contracts are cash-settled, so the underlying asset itself is never delivered.
The buyer is said to be 'long', the seller 'short'. The buyer of the option pays the seller a premium for this right. When instead the market fell Leeson began to accumulate book losses instead of his hoped for book profits. He then started trading in share options to try to make up the loss. With the market continuing to fall this only compounded his losses.