 Generally, a firm looks for ways to reduce its risk exposure. Now derivatives as the name signifies, this is the tool, a financial tool rather that derives its value from some other underlying asset or any other object. It is a tool that is used by a modern day corporate firm in order to cut away some unwanted portion of the risk exposure or the firm can even transform the risk exposure into some other quite different forms. Derivative is a tool that is used to change the firm's risk exposure and in the finance world we see that the risk is undesirable for every individual and every corporate firm in the contemporary world. The individuals and firms chooses those risky projects or securities only if these projects and financial instruments offer required rate of return compensated the underlying risk. Derivative depends upon some primitive or underlying asset or object or security. Some examples of derivatives include options, forwards, tutors or webs. There are two types of derivatives. The first is the use as hedging. This means that taking a little risk to avoid some larger risk and the second use is the speculation of on derivatives. This means that to merely change or even increase the firm's risk exposure. It is notable that if the derivatives is based on some incorrect opinions then it may consequently be proved very costly to the firm or the individual who is using that derivative. Efficient market theory feels much difficult to difficulty to predict that in what ways the firm will behave. So far as the use of derivatives as speculation in instrument and as a hedge tool is concerned our literature shows that most experiences with the derivatives used as speculation have been found very bad compared to the derivatives used as a tool of hedging. Forward contracts. Forward contracts is a contract in which it is a contract between the two parties obligating the buyer to buy and seller to sell the object at a preset price on a given date. A forward is not an option it is an obligation for both of the parties involved therein by buying a forward mean agreeing to buy the object at a later or a preset date. In forward contract there is a deliverable instrument that means the object to trade. And by making delivery means the act of delivering the object to the buyer under this particular contract. Now for every order that cannot be delivered immediately the forward contracts take place in that particular type of order. Forward contract may be in both oral or return and forward contracts are generally a non cash transactions. Let come to future contract. A future forward contract when whose settlement takes place through a recognized trading exchange is termed as a future contract and in future contract the settlement price means the closing price for the day and by open interest means the day and number of outstanding contracts that are still waiting for settlement. There is some difference between future and forward. In future trades take place on a regular and recognized floor or an exchange. The second difference is that in future the seller can choose to deliver object to any date during the month of delivery. In future the prices are daily marked to market. This means that the liquid market allows to be netted off very quickly by the parties involved in the future contracts. In this way the present value of the cash flows to the buyer are seemed very less. In case the prices are increased once the purchase has been done and due to the element of liquidity there are less chances of default on future contracts.