The price is derived from and based on another financial product.

There are four types of derivatives

1. Futures Contracts
2. Options
3. Rights
4. Warrants

Futures Contracts

• buy or sell a specific quantity of an asset at a specific price for delivery during a specific time period

Options

• buy or sell a specific quantity of a security and a specific price within a specific time period
• bond from seller for premium in anticipation of an increase in share price (gives leverage)
• term of 9 months or LEAPS (> 1 yr)

Rights

• allows shareholders to buy more shares from the issuing company
• issued to the common shareholders (one per share)
• term of 2-3 weeks

Warrants

• allow purchase of shares in the company at a stated price during a specific period
• on new issues (e.g., $1000 and bonds than 100 warrants)
• term of 3 years