A future is a standardized, exchange-traded contract (futures contract) where buyer and seller undertake to deliver or purchase a particular quantity of an underlying of a specific quality at maturity at a specified price. A distinction is made between commodity futures (futures contracts on commodities) and financial futures (futures contracts on shares, bonds, indices and currencies).
With an option, the buyer has the right (but not the obligation), for a limited period of time, to accept a contractual offer. The contractual offer specifies the price and quantity of the commodity being offered. A “call” gives the right to buy the commodity at a particular price, and a “put” the right to sell a particular commodity at a predetermined price. The decision to exercise the option is solely that of the buyer. If the buyer does not use their right to exercise the option before maturity, the option expires worthlessly. Investors use options primarily to hedge against price fluctuations or bet on the direction of a price.
A swap is an agreement for an exchange between two parties. Swaps are usually traded off-exchange (over the counter, OTC), as they are non-standardized contracts that have to be negotiated individually. Their main function is to hedge obligations: if, for example, a borrower with a variable interest rate expects a rise in the rate, they can therefore hedge against that rise by swapping the variable rate for a fixed rate. However, swaps also provide the opportunity to gain a comparative advantage: if, for example, it is easier for a company to raise a loan on terms contrary to its business interests, it can switch the terms of the loan at a later date by swapping it for a loan with a comparative advantage.
