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of <h1>Understanding Derivative Contracts: Options, Swaps, Futures, and Forwards Explained with Fair Value Accounting</h1> Derivative financial instruments are contracts between two parties to buy or sell an underlying asset at a future date for a specified price. Examples include options, interest rate swaps, currency swaps, futures, and forwards. To qualify as a derivative, the contract must change in value based on the underlying asset, require minimal initial investment, and be settled in the future. Forward and option contracts can be settled in cash or physically, while futures are cash-settled. Derivatives are recognized as financial assets or liabilities based on their potential favorability and are measured at fair value through profit or loss. Journal entries are made at commitment, balance sheet, and settlement dates, reflecting changes in fair value in the profit or loss account.
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