Forwards are like futures, allowing traders to buy and sell the obligation to take delivery on commodities or other financial instruments. But whereas futures are standardized contracts sold on an exchange, forwards are non-standardized, trade over the counter and are not cleared by a central middleman, meaning that the counterparties in a contract take on greater risk. While the futures market is overseen by the Commodity Futures Trading Commission, the forwards market has little, if any, oversight, since they’re private contracts between third parties.

The upside of forwards is that market participants can buy a bespoke contract giving them exactly the exposure they want (if they can find someone to offer it). The downside is that they take on greater risk that the counterparty can’t meet its end of the deal and settle the contract.

Options are the right to buy or sell a stock at a specific price (called the strike price) by a specific date. Options come in two major varieties: call options, which give you the right to buy a stock at a certain price, and put options, which give you the right to sell a stock at a certain price.

An option has a fixed expiration, after which its value is settled between the parties to the contract, and then the option ceases to exist. The option can expire with only two outcomes: it’s worth some amount of money or nothing, making options a high-risk, high-reward trade.

Swaps are a kind of financial contract that allow counterparties to trade a series of cash flows between them. They don’t trade the underlying asset themselves, but instead typically make a contract to pay each other based on the net change in the cash flows being swapped. So, swaps allow market participants who have differing preferences to exchange their exposure to a given underlying asset. A swap is a contract between private parties and traded over the counter, so they’re not standardized nor cleared by a central middleman, creating greater counterparty risk.

A swap can be a derivative of several different underlying elements, including commodities, stocks, foreign exchange and interest rates. A typical swap contract might involve the exchange of a cash flow based on a fixed interest rate for a cash flow based on a floating rate, called an interest rate swap. Why do that? One party expects interest rates to fall and wants to swap its fixed-rate exposure for floating rate exposure to a party who expects rates to rise. So that swap acts as a side bet on rates. The net cash flow (the difference) is paid from one party to the other, according to the terms of the contract, but no actual debt is traded between the two parties.