RATIO ANALYSIS

MEANING:
Ratio Analysis:
It is the relationship between two financial values. To
make it clear the word relationship stands for a financial ratio
which is the result of two mathematical values.
Uses:
It is useful to know whether the concern is making profit or
loss.
It is useful for making decisions in the management.
Interpreting of financial statements.
Classification of ratios:
1. Profitability ratios
2. Activity turn over ratios
3. Financial ratios
a) Liquidity ratios
4. Miscellaneous ratios

b) Leverage ratios

Before going to ratios we need to know about what the current

assets are & what the current liabilities are
Current Assets:
Cash in hand
Cash at bank
Inventory (or) Stock
Sundry debtors
Bills receivable
Investment (or) Securities
Prepaid expenses (or) Income to be received
Fixed Assets:
Furniture & fixtures
Tools and equipment
Motor vehicles
Plant & machinery
Land & Buildings
Lease hold premises
Intangible Assets:
Trade marks
Patents
Copy rights
Goodwill

Current Liabilities:
Sundry creditors
Bills payable
Bank overdraft
Outstanding expenses
Provision for taxation
Income received in advance
Long Term Liabilities:
Mortgage loan
Bank loan
Loan from family members

Profitability Ratios:
Formulaes:
a) Gross profit ratio:
Gross profit
--------------- 100
Net sales
This ratio tells us the result from trading activity to know
operating efficiency of the organization.

b) Net profit ratio:

Net profit
------------- 100
Net sales
It indicates the final result to organization and overall
efficiency of the organization.

c) Operating ratio:
CGS + operating expenses
---------------------------------- 100
Net sales
This ratio speaks of the operational performance of the
organization and refers the managerial efficiency of the firm.

Where,
CGS = Sales Gross profit (or)
Opening stock + purchases + manufacturing expenses
closing stock
Operating expenses = Office Administrative Expenses +
Selling & Distribution Expenses + Financial Expenses.

d) Operating net profit ratio:

100 Operating ratio

Expenses ratios:

 Cost of goods sold ratio:

Cost of goods sold
------------------------- 100
Net Sales
Operating expenses ratio:

Operating expenses
------------------------- 100
Net Sales
Administrative office expenses ratio:
Administrative office expenses
--------------------------------------- 100
Net Sales
Selling & distribution expenses ratio:
Selling & distribution expenses
-------------------------------------- 100
Net sales
Financial expenses ratio:
Financial expenses
----------------------- 100
Net sales

 Non-operating expenses ratio:

Non - operating expenses
---------------------------------- 100
Net sales

e) Return on capital employed

(or)
Return on Investment
(or)
Rate of return
Net profit
---------------------- 100
Capital employed
(or)
Return
-------------- 100
Investment
Where,
Capital employed = Equity share capital + Preference
share capital + Reserves & surplus + Fixed liabilities
(Long term) Fictitious assets.
(or)
Fixed Assets + Current Assets Current liabilities.

f) Return on shareholders fund:

Net profit after taxes
--------------------------- 100
Shareholders fund
g) Return on equity shareholders fund:
Net profit after Interest, taxes & Pref. dividend
-------------------------------------------------------- 100
Equity shareholders fund
h) Earnings per share: (EPS)
Profit available to Equity Shareholders
-----------------------------------------------No. of equity shares
(or)
Net profit after taxes - Preference share dividend
----------------------------------------------------------No. of equity shares

i) Dividend per share: (DPS)

Dividend on Equity Share Capital
----------------------------------------No. of equity shares
j) Dividend yield ratio: (DYR)
Dividend per share
----------------------------- 100
Market value per share

k) Dividend pay-out ratio: (DPR)

Dividend per equity shares
--------------------------------Earnings per share
l) Earnings yield ratio: (EYR)
Earnings per share
---------------------------- 100
Market value per share
m)

Retained earnings ratio:

Retained earnings
------------------------ 100
Total earnings

Activity Turnover Ratios:

Formulaes:
a) Stock turnover ratio:
(or)
Inventory turnover ratio:
Cost of goods sold
-------------------------------Average Inventory at cost
b) Debtors turnover ratio:
(or)

Receivable turnover ratio:

Net credit sales
----------------------------------Average accounts receivable
(Average account receivable = Debtors + Bills receivable)

c) Creditors turnover ratio:

(or)
Payable turnover ratio:
Net credit purchases
--------------------------------Average accounts payable
(Average accounts payable =creditors + Bills payable)

d) Fixed assets turnover ratio:

Net sales
---------------------Net Fixed Assets

e) Current assets turnover ratio:

Net sales
------------------Current Assets

f) Total assets turnover ratio:

Net sales
----------------Total Assets

g) Working capital turnover ratio:

Net sales
--------------------------Net Working Capital

Financial Ratios:
Formulaes:
a) Current ratio:
Current Assets
-----------------------Current Liabilities
b) Quick ratio:
Quick assets
--------------------Quick liabilities

Where,
Quick assets = CA Stock & Prepaid expenses
Quick liabilities = CL Bank overdraft

c) Absolute liquid assets:

Absolute liquid assets
---------------------------Current liabilities
Where,
(Absolute liquid assets = Quick assets)

d) Debt equity ratio:

Outsiders fund
-----------------------Shareholders fund

Where,
Outsiders fund = Debentures, Secured loans,
Mortgage loans & Bank loan.

e) Proprietary ratio:
Shareholders fund
-----------------------Total Assets
Where,
Shareholders fund = Equity shareholders fund
Preference shareholders fund
R&S + P&L Intangible assets
Undistributed Profits.

f) Solvency ratio:
(or)
Total liabilities to total assets:
Total Liabilities
--------------------- 100
Total Assets

Miscellaneous Ratios:
Formulaes:
a) Capital turnover ratio:
Net sales
---------------------Capital employed
b) Stock to current assets ratio:
Stock
------------------Current Assets
c) Inventory to working capital ratio:
Inventory
---------------------Working Capital

Other Important formulaes:

a) Profit earnings ratio: (P/E)

Market value per share

----------------------------Earnings per share
It is a measure for determining the value of a share. May
also be used to measure the ratio of return expected by
investors.
b) Break-even-point: (BEP)
Fixed Cost
-----------------------Profit volume ratio
This a point at which there is no profit or no loss.
c) Profit volume ratio:
Contribution
----------------- 100
Sales
It is a ratio between contribution and sales

d) Margin of safety: (M/S)

Total sales Break-even point
e) Capitalization method:

Future maintainable profits

Net Capital employed = -----------------------------------Normal rate of return

Debit note:
It is the note prepared and sent to the supplier while
returning the goods purchased on credit from him, intimating
that his account is debited to the extent.
Credit note:

It is the note prepared and sent to the customer after

receiving the goods returned by him, intimating that his account
is credited to that extent.

Definition of Accounting:
Accounting has been defined by the American Institute of Certified Public
Accountants, a "The art of recording, classifying and summarizing in a significant

manner and in terms of money, transactions and events which are, in part at least,
of a financial character, and interpreting the results thereof".

Principles of Accounting:
a) Personal account:
Debit the receiver
Credit the giver
b) Real account:
Debit what comes in
Credit what goes out
c) Nominal account:
Debit all expenses & losses
Credit all gains & incomes

Accounting process:

Transaction
Generation of Voucher
Recording in Journal
Posting into Ledger

Generation of Trial Balance

Trading & Profit & loss account
Balance Sheet

Concepts of Accounting:
1. Business entity concept: According to this concept, the business is treated
as a separate entity distinct from its owners and others.
2. Going concern concept: According to this concept, it is assumed that a
business has a reasonable expectation of continuing business at a profit for
an indefinite period of time.
3. Money measurement concept: This concept says that the accounting
records only those transactions which can be expressed in terms of money
only.
4. Cost concept: According to this concept, an asset is recorded in the books at
the price paid to acquire it (Actual cost) and that this cost is the basis for all
subsequent accounting for the asset.

5. Dual aspect concept: In every transaction, there will be two aspects the
receiving aspect and the giving aspect; both are recorded by debiting one
accounts and crediting another account. This is called double entry.
6. Accounting period concept: It means the final accounts must be prepared
on a periodic basis. Normally accounting period adopted is one year, more
than this period reduces the utility of accounting data.
7. Realization concept: According to these concepts, revenue is considered as
being earned on the data which it is realized, i.e., the date when the property
in goods passes the buyer and he become legally liable to pay.
8. Matching concept: The cost or expenses of a business of a particular period
are compared with the revenue of the period in order to ascertain the net
profit and loss.
9. Accrual concept: The profit arises only when there is an increase in
owners capital, which is a result of excess of revenue over expenses and
loss.
10.Objective Evidence Concept:

Accounting Conventions:
1. Consistency: Accounting practices should remain the same from year to
year.
2. Disclosure: All information which is essential for fully understanding the
financial statements should be disclosed in addition to the information
required to be disclosed by law.
3. Conservatism: Financial statements should be drawn up on a conservative
basis i.e., anticipated income should not be recorded where as likely losses
should be provided for.
4. Materiality concept: It is a one of the accounting principle, as per only
important information will be taken, and unimportant information will be
ignored in the preparation of the financial statement.

Journal:

The journal contains details of transactions (other than those relating to

receipts or payments in cash or through bank), recorded in chronological order.

Ledger:
Ledger is a set of accounts. It contains all accounts of the business enterprise
whether real, nominal, personal.

Trail balance:
A trial balance is a statement of debit and credit balances extracted from the
various accounts in the ledger with a view to test the arithmetical accuracy of
books.
Debit note:
It is the note prepared and sent to the supplier while returning the goods
purchased on credit from him, intimating that his account is debited to the extent.
Credit note:
It is the note prepared and sent to the customer after receiving the goods
returned by him, intimating that his account is credited to that extent.

Single Entry system:

Under this system, only one aspect of each transaction is recorded. This is
not a scientific method of accounting and is prone to error and manipulation.

Double Entry system:

Under this system, both aspects of each transaction are recorded, ensuring
that the sum of all debits is equal to the sum of all credits. This is the most
scientific method of accounting and reduces the occurrence of errors and scope for
manipulation.

Trading account:
It is the account prepared to find out trading profit or loss of the business
i.e., Gross profit or loss during the period. This is a Nominal Account in its nature
hence all the Trading expenses should be debited where as all the Trading incomes
should be credited to Trading Account. The Balance of Trading Account will be
considered as Gross profit (credit balance) or Gross loss (debit balance) and will be
transferred to Profit and loss account.
While preparing the Trading Account the following equation also can be used
Sales less returns (-) Cost of Goods sold =Gross Profit or Gross loss.
Sales=Total (Cash + Credit) sales
Cost of goods sold = Opening stock of goods = Purchases (Cash + Credit) less
returns +Direct Expenses (-) Closing Stock of Goods.

Profit & Loss account: (P&L a/c)

It is the Account prepares to find out net profit or loss of the business during
the period. This is a Nominal Account in its nature. Hence all the other expenses
and losses should be debited where as all the other incomes and gains should be
credited to profit & loss account. The balance of Profit & loss account will be
considered as Net Profit (Credit Balance) or Net Loss (Debit Balance) and will be
transferred to Capital Account.
While preparing Profit & Loss Account the following equation can be used.
Gross Profit + Other incomes / gains (-) in Direct Expenses/Losses = Net Profit or
Net Loss

Balance sheet: (B/S)

It is the statement prepared to find out financial Position i.e., Assets and
Liabilities of a concern on a given date. It is a statement (not an account) prepared
by taking all the real accounts & personal accounts.

Bank Reconciliation Statement: (BRS)

It is a statement reconciling the balance as shown by the bank pass book and
balance shown by the cash book.

Depreciation:

Depreciation denotes gradually and permanent decrease in the value of asset

due to wear and tear, technology changes, laps of time and accident.

Depreciation Methods:
1.
2.
3.
4.
5.
6.
7.
8.

Fixed installment method

Diminishing balance method/ Written down value method
Annuity method
Depreciation/Sinking fund method
Insurance Policy method
Machine hour rate method
Depletion method
Revaluation method

Capital Reserve:
The reserve which transferred from the capital gains is called capital reserve.

General Reserve:
The reserve which is transformed from the normal profits of the firm is
called general reserve.

Capital Expenditure:
Any amount spent in increasing the earning capacity of a business is called
as Capital Expenditure and includes Expenses like Purchase, Installation and
improvement of Fixed Assets and repayment of loans.

Revenue Expenditure:

Any amount spent in earning Revenue/Profit is called as Revenue

Expenditure and includes the Expenses like salaries, rent, wages, repairs,
maintenance, stores, depreciation and materials etc.,

Capital Receipts:
Any amount Received as investment by the owners, raised by the way of
loans and sale proceeds of fixed Assets is called as capital Receipt.

Revenue Receipts:
Any amount Received in the normal course of Business is called as Revenue
Receipts and includes sale of goods, interest, discount, commission, rent received.

Deferred Revenue Expenditure:

The benefit of the expenditure will be differed to the future periods for
which the expenditure is charges. Differed revenue expenditure is known as asset
in balance sheet.
Ex: Preliminary expenses, Advertisement expenses.

Deferred Revenue Income:

Deferred revenue income which is income differed to the future periods.
That means it is not related to one period but related to more than one period.
Ex: Pension Fund Scheme.

Accrued expenses:
The expenditure which is incurred and the payment there of might or might
not be paid.

Accrued income:
Income earned during the current accounting year but has not been actually
received by the end of the same year.

Prepaid expenses:
The amount paid for the expenditure relating to the future years. Prepaid
expenses are to be deducted from such expenses in the debit side of profit and loss
account, Shown on the asset side of a Balance sheet as an asset.

Outstanding expenses:
Outstanding expenses refer to those expenses which have become due
during the accounting period for which the final accounts have been prepared but
have not yet been paid.

Outstanding income:
Outstanding income means income which has become due during the
accounting year but which has not so far been received by the firm.

Account receivable:
Money owed by customers to another entity in exchange for goods or
services that have been delivered or used, but not yet paid for. Receivables usually
come in the form of operating lines of credit and are usually due within a relatively
short time period, ranging from a few days to a year.

Account payable:
Money which a company owes to vendors for products & services purchased
on credit. Since the exception is that the liability will be fulfilled is less than a year.
When accounts payable are paid off, it represents the negative cash flow of the
company.

Debentures: (AS-6)
When a company borrows money from investing people, it issues a bond
which is stamped with the official seal of the company. These bonds are called
"Debentures".
Debentures are the most common form of loan capital which is made
available by investors on a long-term basis.

 Debenture holders will get fixed rate of interest.

Interest is payable whether company earns profits or not.
It is repayable on a specific date.

Memorandum of Association: (MOA)

It is the main document of the company. This document represents
constitution of that company. It subordinates to the act and it is must for every
company.
It contains
1) Name clause,
2) Objective clause,
3) State clause,
4) Capital clause,
5) Liability clause, and
6) Situation clause.

Articles of Association: (AOA)

This document represents rules and regulations of the company. It is a
secondary document. It defines duties, rights, and regulations of the company
between themselves and company

Cash flow statement: (AS-3)

Cash flow statement is a statement shows how much cash is generated and
expensed in the organization during the year, it also opening and closing balance of
cash.
It is useful for investors and creditors

 It provides vital information about the companys ability to generate future

cash flow to satisfy investors and creditors expectation.

Fund flow statement:

A statement that uses net working capital as a measure of liquidity position
is referred to as funds flow statement.
Reveals the changes in the working capital and gives the details of the
sources from which working capital has been financed.
Helps in the analysis of the financial operations and explains causes for the
changes on the liquidity position of the company.

Helps in making correct decisions in planning and development of the

company

Differences between cash flow & fund flow statement:

Cash flow statement

Funds flow statement

1) Cash flow statement is concerned

only with the change in cash
position.

1) Funds flow statement is

concerned with change in
working capital position between
two balance sheet dates.

2) A cash flow statement is merely

record of cash receipts and
disbursements.

3) A funds flow is the studying the

solvency of a business one is
interested not only in cash bal but
also in the assets which are easily
convertible into cash

Differences between equity shares & preference share holders

EQUITY SHARES

PREFERENCE SHARES

1) Equity Share Holders get Equity

Shares of the Company.

1) Preference Share Holders get

Preference Shares.

2) Equity shares which are not

having preference rights.

2) Preference shares which are

carrying the preference rights.

3) Equity Shares are shares whose

profit sharing depends on Profit
Making of the Co.
If the company makes huge
profits, there dividend sharing
will be high else it will be low.

3) Preference Share Holders,

Dividend is a fixed income to
them. They get dividend at a
fixed rate, Irrespective of the
Profit Making of the Company.

4) Dividends to Equity Share

Holders is optional and at
company's discretion.

4) Preference Share Holder, it is a

right to get cumulative or non
cumulative dividends from the
company.

5) Equity Shareholders are called

RESIDUAL OWNERS of the
company. After all the obligations
of the company are over, the
Equity Share Holders get their
share.

5) Preference Share Holders get paid

their dividends ahead of Equity
Shareholders.

Difference between Public Limited Co & Private Limited Co

Public Limited Company

Private Limited Company

1) Public limited co is a listed

company at the stock exchange.

1) Private limited company is not a

listed company at the stock
exchange.

2) In public limited company there are

minimum seven members require
to start it operations, and there is
no limit for maximum.

2) In private limited company there

are minimum two members require
to start its operations, and
maximum members are 50.

3) In public ltd company minimum

directors-3.

3) In private ltd company minimum

directors-2.

4) Public ltd company starts its

operations only after getting
business commencement certificate
(but not after incorporation).

4) Private ltd company can start

business after incorporation.

5) Public ltd company can go to

public issue.

5) Private ltd company shall not issue

shares to the outsiders.

Bombay Stock Exchange: (BSE)

Bombay stock exchange is the first and securities market in India,
the BSE was established in the year 1875 as the Native share & stock
brokers association based on Mumbai, India. The BSE list over 6000

companies & is one of the largest exchanges in the world. The BSE has
helped to develop the countrys capital markets, including the retail debt
market and helped to grow the Indian corporate sector.

National Stock Exchange: (NSE)

The National Stock exchange is Indias largest financial market.
Established in the year 1992, the NSE has developed into a
sophisticated, electronic market, which ranks third in the world for
transacted volume.
The national stock exchange conducts transactions in the wholesale debt,
equity & derivative markets.

Initial Public Offering: (IPO)

IPO stands for Initial Public offering. The shares are issued for the
first time to the public as opposed to the secondary market.
IPOs are often risky investments, but often have the potential for
significant gains.
IPOs are often used as a way for a young company to gain necessary
market capital.

Follow on Public offering: (FPO)

An issuing of shares to investors by a public company i.e., already
listed on a stock exchange.

An FPO is essentially a stock issue of supplementary shares made

by a company that is already publicly listed and has gone through the
IPO process.

Mutual Fund:
A mutual fund is made up of money i.e., pooled together by a large
number of investors who give their money to a fund manager to invest in
a large portfolio of stocks and/or bonds.
Open-ended fund:
Open ended funds means investors can buy and sell units of fund,
at NAV related prices at anytime, directly from the fund this is called
open ended fund. For ex: unit 64.
Close-ended fund:
Close ended funds means it is open for sale to investors for a
specific period, after which further sales are closed. Any further
transaction for buying the units or repurchasing them, happen, in the
secondary markets.

Capital Market:

The market for long term funds where securities such as common
stock, preferred stock, and bonds are traded. Both the primary market for
existing securities is the part of capital market.
Primary market:
Primary Market is a channel for issuance of new securities.
Every organization, corporate as well as Government needs funds
for further expansion. Primary Market provides an opportunity to
the issuers of the securities, Government as well as corporates, to
raise resources to meet their requirements of investment. The
securities may be in various forms such as equity or debt. The
primary market is regulated by the Securities and Exchange Board
of India (SEBI a government authority).

Secondary market:
Secondary Market refers to a market where securities are traded
after being initially offered to the public in the primary market
and/or listed on the stock exchange. Majority of the trading is done
in the secondary market. Secondary market comprises of equity
market and the debt markets.
Bonds:
A debt instrument issued for a period of more than one year with
the purpose of raising capital by borrowing.

A bond is a promise to repay the principle along with interest on a

specified date.
Bonds are often divided into different categories based on tax
status, credit quality, issuer type, maturity & secured/unsecured.

Suspense account:
A suspense account is the account prepared to transfer difference in
trial balance if any to be rectified in future.

Rectification of errors:
It is the process of rectifying or correcting errors if committed any
in the books of accounts.
Bad debts:
Bad debts denote the amount lost from debtors to whom the goods
were sold on credit.
Fictitious assets:
These are assets not represented by tangible possession or
property. Examples of preliminary expenses, discount on issue of shares,
debit balance in the profit and loss account when shown on the assets
side in the balance sheet.

Working capital:

The funds available for conducting day to day operations of an

enterprise. Also represented by the excess of current assets current
liabilities.

Venture capital:
It refers to the financing of high risk ventures promoted by new
qualified entrepreneurs who require funds to give shape to their ideas.
Amortization:
The process of writing off of intangible assets is term as
amortization.
Capital employed:
The term capital employed means sum of total long term funds
employed in the business. i.e.(Share capital + reserves & surplus + long
term loans (non business assets + fictitious assets)
Minority Interest:
Minority interest refers to the equity of the minority shareholders
in a subsidiary company.
Leverage:
It is a force applied at a particular point to get the desired result.

Operating leverage:

The operating leverage takes place when a changes in revenue

greater changes in EBIT.
Financial leverage:
It is nothing but a process of using debt capital to increase the rate
of return on equity.
Combined leverage:
It is used to measure of the total risk of the firm = operating risk +
financial risk.
Joint Venture:
A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit
or loss thereof an agreed ratio.
Partnership:
Partnership is the relation b/w the persons who have agreed to
share the profits of business carried on by all or any of them acting for
all.
Factoring:
It is an arrangement under which a firm (called borrower) receives
advances against its receivables, from financial institutions (called
factor).

Capital budgeting:

Capital budgeting involves the process of decision making with

regard to investment in fixed assets. Or decision-making with regard to
investment of money in long term projects.
Payback period:
Payback period represents the time period required for complete
recovery of the initial investment in the project.
ARR:
Accounting or Average rates of return means the average annual
yield on the project.
NPV:
The net present value of an investment proposal is defined as the
sum of the present values of all future cash inflows less the sum of the
present values of all cash out flows associated with the proposal.
Profitability index:
Where different investment proposal each involving different
initial investments and cash inflows are to be compared.
IRR: Internal rate of return is the rate at which the sum total of
discounted cash inflows equals the discounted cash out flow.
GDR: (Global depository receipts)
A depository receipt is basically a negotiable certificate,
dominated in us dollars that represent a non-US company publicly
traded in local currency equity shares.

ADR: (American depository receipts)

Depository receipt issued by a company in the USA is known as
ADRs. Such receipts are to be issued in accordance with the provisions
stipulated by the securities Exchange commission (SEC) of USA like
SEBI in India.
Budget:
It is a detailed plan of operations for some specific future period. It
is an estimate prepared in advance of the period to which it applies.
Budgetary control:
It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the
actual results compared with the forecasted and planned ones.
Cash budget:
It is a summary statement of firms expected cash inflow and
outflow over a specified time period.
Master budget:
A summary of budget schedules in capsule form made for the
purpose of presenting in one report the highlights of the budget forecast.
Fixed budget:
It is a budget which is designed to remain unchanged irrespective
of the level of activity actually attained.

Zero-based budgeting:
It is a management tool which provides a systematic method for
evaluating all operations and programs, current of new allows for budget
reductions and expansions in a rational manner and allows reallocation
of source from low to high priority programs.
Marginal cost:
It is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of
production, i.e. materials, labour, and direct expenses and variable
overheads.
Marginal costing:
An additional cost which is involved for production of
additional unit.

DERIVATIVES
Derivative: This derivative concept was introduced in India in the year
1992.
Derivative is product whose value is derived from the value of one or
more basic variables of underlying asset.
(or)
A Derivative is a financial contract whose value is derived from or
depends on the price of some underlying asset. Equivalently the value
of a derivative changes when there is a change in the price of an
underlying related asset.
Underlying assets:
Shares
Securities
Commodities ( food grains, oils, cotton etc )
Bullion
Stocks
Bonds
Currency
Types of derivatives:
Mainly there are four types of derivatives they are
1. Forward contract
2. Future contract
3. Options
a) Call option b) Put option
4. Swaps

1. Forward contract:
A forward contract is customized contracts between two entities
were settlement takes place on a specific date in the future at
todays pre agreed price.
(or)
It is an agreement between two parties for exchanging of
underlying asset at a specific consideration amount at specified
time period. The price of forward contract remains fixed till
maturity.

2. Future contract:
A future contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Future
contracts are standardized exchange traded contracts.
(or)
It is an agreement between two parties for exchanging of
underlying asset at a specific maturity date to the future maturity
date market value, in future contract maturity value is fixed on the
rate of maturity date at market price.

3. Options:
An option gives the holder of the option the right to do something.
The option holder option may exercise or not.

Call option:
A call option gives the holder the right but not the obligation
to buy an asset by a certain date for a certain price.
Put option:
A put option gives the holder the right but not obligation to
sell an asset by a certain date for a certain price.
American option:
This American option should be exercised before the
maturity date or earlier to maturity date.
European option:
This European option should be exercised only after the
maturity date.
Bermuda option:
This Bermuda option is an combination of both American &
European option.

4. Swaps:
Swaps are private agreements between two parties to exchange
cashflows in the future according to a pre-agreed formula.

Types of swaps:
Interest rate swaps:
An interest rates swap is an agreement between two parties to
exchange interest payment for a specific maturity for an
agreed notional (principle) amount.
Currency swaps:
It is an agreement between two parties for exchanging of two
different currencies for a specified date along with exchange
of principles.