Derivatives are tradable products. But that are based upon another market. And this other market is known as underlying market. Therefore, derivatives are simpler form in financial security. However, derivatives markets can be based upon any underlying market. It consists of individual stock, stock indexes and currency markets. Check on types of derivative markets.
Definition of Derivative
Derivative is product whose value is derived from asset. It is financial instrument. Because it is contract between two parties. Generally, value of underlying assets keeps changing continuously. It also called bases. Such as equity forex, commodity or any other asset. You can also view derivative examples.
In India derivative segment. It allows trading in equities, currency and commodities. Therefore derivatives can be used for number of purposes. Hence, it can be used for risk management. So there are two types of derivatives instruments. Such as futures and options that are traded on stock exchanges.
Futures contract is very similar to forward contract. Similarly, that future contract also mandate to sale of commodity. Because you can sell future data but at present price. However, future contracts are listed on exchange. You can see features of derivative.
This Mean that exchange is an intermediary. Hence, these contracts are standard. And future contract is an agreement between two parties. Because you can buy or sell an asset at exchange traded contract. Moreover, agreement cannot be modified in any way. View future stocks in market.
Since these contracts are traded on exchange. You need to follow daily settlement procedure. Because, for any gains or losses on this contract given date. And you have to settle on that same day. You need to mention an important point. Hence, in case of futures contract. You do not enter into an agreement with one another.
Index / Stock options
An Option is financial instrument. But that gives holder to engage in future transaction. Therefore, holder is under no obligation to exercise this right. There are two main types of option. Such as call and Put. Probably, calls give buyer right, but not obligation. You can check types of option.
You can buy given quantity of underlying asset. But at given price on before future date. However, puts give seller right but not obligation. You can sell given asset at given price before date. Therefore you can buy without obligation. Check derivative market and instruments.
While seller has an obligation if buyer requested to buy or sell. You need to buy or sell security at specified price and time. You can be on long side or short side of put or call option. Like futures, options are also traded on exchange. So, one party has obligation to buy or sell at later date. Whereas other party can make choice.
Currency Derivatives trading was introduced in Indian Financial market. It has launch of currency futures trading in USD INR pair at NSE. And few more currency pairs have also introduced. Therefore, it also introduced in BSE and MCX. Check on types of currency derivatives in market.
However, it derives its value from some underlying asset. It has no independent value. Probably, underlying can be securities, stock market, commodities, bullion or currency. Derivatives are unique products. It helps in hedging portfolio against future risk. You can check on currency derivative examples. Knowing how currency market work is important.
Commodity market that trades in primary economic sector. But in this market raw products are exchanged in market. And also these raw products are traded on commodities exchanges. You can buy and sell in for specified future date. You can also to know characteristics of commodity.
Commodity derivatives market covers various segments. Such as agriculture, metals, coal, and gas. You can increase long term returns and saving. It also helps to transfer risk. However, farmers have used simple form of derivative. So it is simple to trade in commodity market. Check on commodity derivative meaning with examples.
Interest Rate Futures
Interest Rate Future is futures contract. Because, it pays interest with an underlying instrument. It has 10 years coupon bearing GOI security. But this contract is settled by physical delivery of securities. And these securities are entering into electronic book of depository. Check on interest rate futures pricing.
NSDl and CDSL and public debt office of Reserve bank will settle cash. Moreover, interest rate futures market has future price. Check how interest rate future works. Hence, futures interest rates are based on an underlying security. So when you buying an interest rate futures. It will lock in future investment rate.
Finally, derivatives market performs no of economic functions. And also help in transferring risk for future as well as current. It will increase in saving and investment in long term. However, derivatives exchanges acts as an intermediary to all transaction. And also take initial margin from both sides of trade. So it acts as guarantee.