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A future is defined as the form of financial derivatives that require the party to purchase the given security at the specified date in future.  The Options is a kind of financial derivative that gives the holders a choice of purchasing fixed amount of stock or security at a particular price during the specified date in future.

The futures contract obliges owners to buy the assets according to the terms and condition from the exchange regarding the quantity and quality of underlying asset and the expiration date.  This will in turn, allow the futures contract to have minimum liquidity risks than the forward contracts and the same can be traded like the common stocks on the secondary markets. 

Also, the futures contract have less default risk or credit risk as compared to the forward contracts as both the parties are required to make deposit of the funds in the margin account, that is generally 3 to 6 % of the price of contract.  The funds are either subtracted or added from this margin account on day to day basis and the same reflects the changes in the prices in futures contract.  Therefore the futures market is daily cash settled.

Also, the options may allow the investors to sell the known quantity of stock at  certain price and at a certain time in future.  Generally, the options require pre existing quantity of stock which is generally called as the option premium.

The option contract mechanism doesn’t oblige a holder to exercise his right.  This is the reason why the options, futures and the forwards differ from each other.  In the forwards and the futures, the holder is actually supposed to sell or purchase the asset.  If you buy an option, it will carry minimum risk of losses.  In case of selling an option, it gives limited opportunity to gain the option premium in case if the option gets expired worthless and the unlimited losses risk depends on the strike rate  and  price of the asset diverge.

Here are the following factors that drive growth of the financial derivatives:

• The Increased volatility in the asset prices in the financial markets lead to growth of the financial derivatives.

• When there is increased integration of the global financial market it drives the growth of the financial derivatives

• When there is marked improvement in the communication facilities and very sharp decline in the costs also tends to drive the growth of the financial derivatives.

• When there is development of the best risk management tools, the same provides the economic agents to have a wider choice in the strategies of the risk management and the same leads to the growth of the financial derivatives.

• There is growth of the financial derivatives when there is innovation in the derivative markets which will optimally add up the returns and the risks over a huge amount of financial assets.  This will lead to high returns, reduced risk and reduced transaction cost as compared to the individual financial asset.