Futures
These are contracts that obligate the buyer to purchase an underlying asset or the seller to sell an underlying asset at a predetermined price on a specified future date.
Derivative Market
The derivative market is a financial market where financial instruments known as derivatives are traded. Derivatives derive their value from an underlying asset, index, or rate, such as stocks, bonds, commodities, currencies, interest rates, or market indices. These instruments are used for various purposes including hedging against risks, speculation, and portfolio diversification.
The Indian derivatives market is a significant component of the country's financial landscape, allowing investors to hedge risk and speculate on the future price movements of various assets. Here are some basics:
Types of Derivatives Market
Options
Options give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified period.
Underlying Assets
Indian derivative markets offer derivatives based on various underlying assets, including equities, indices, currencies, and commodities.
Regulatory Bodies
The Securities and Exchange Board of India (SEBI) regulates the derivatives market in India. It formulates rules and regulations, oversees market activities, and protects the interests of investors.
Exchanges
Derivative contracts in India are traded on two major exchanges
National Stock Exchange (NSE)
It is the leading exchange for trading equity derivatives in India.
Bombay Stock Exchange (BSE)
BSE also offers trading in derivatives, including equity, currency, and interest rate derivatives.
Market Participants
Various entities participate in the Indian derivatives market, including retail investors, institutional investors, arbitrageurs, and speculators.
Margin Requirements
To trade derivatives, investors are required to deposit an initial margin with the exchange to cover potential losses. Additionally, maintenance margins may be required to ensure that the margin remains above a certain threshold.
Settlement
Derivative contracts in India can be settled in two ways
Cash Settlement
The difference between the contract price and the settlement price is settled in cash.
Physical Settlement
The underlying asset is exchanged upon contract expiration.
Risk Management
Risk management is crucial in derivative trading. Investors use derivatives to hedge against price fluctuations and manage their risk exposure.
Market Surveillance
SEBI and the exchanges closely monitor the derivatives market to ensure fair and transparent trading practices. They employ various surveillance mechanisms to detect and prevent market manipulation and fraud.
