Derivatives are financial instruments that derive price from the underlying. The underlying may be stocks, currency, bonds or commodities.
Derivatives instruments in India involve futures and options. Futures may be termed as the bundle of stocks or indices that may be bought or sold on exchanges at a planned price and date. options on the opposite hand offer the buyer a right however not an obligation to buy or sell and underlying at a predetermined price.
Futures may be used to hedge a portfolio. they’ll even be used for arbitrage which can arise from a distinction between futures and cash price. Futures can even be used to have the benefit of expected increase/decrease in the price of the underlying by paying initial margin. options offer remunerative trading opportunities for individuals with low-risk appetency. options can even be used to hedge the risk related to buying or selling futures. options being versatile will be used to devise artificial positions.
Individuals tend to over leverage their positions which might end in the vital loss. options may result in time decay if underlying continues to trade in the range. options also are exposed to risk arising from increase/decrease in implied volatility.
Commodity derivatives markets have been existing for years, driven by the efforts of commodities producers, users, traders, and investors to manage their business and money risks.
Producers need to manage the exposure to changes in the costs they receive for his or her produce. they’re largely targeted on achieving an equivalent impact as mounted prices on contracts to sell their manufacture. A silver producer, as an example, needs to hedge its losses from a fall within the price of silver for its current silver inventory. Agri producers ought to hedge the risk of value changes in cotton, coffee, beans and other commodities they sell.
End-users need to hedge the prices at that they will purchase commodities. an oil refinery and oil selling company need to lock the price of the crude oil it must purchase so as to satisfy the height in demand.
Investors and financial intermediaries will either buy or sell commodities through the utilization of derivatives. Today, the commodity derivatives market is that the primary economic sector for the exchange/trading of essential goods and products.
Currency derivatives are a contract between the seller and buyer, whose price is to be derived from the underlying asset i.e. the currency price. A derivative supported currency exchange rate is an agreement that two currencies will be changed during a specific quantity of a specific currency pair at a future date.Currency Derivatives will be Future and choices contracts that area unit almost like the Stock Futures and choices however the underlying happens to be currency pair (i.e. USDINR, EURINR, JPYINR OR GBPINR) rather than Stocks. Currency Derivatives area unit offered on four currency pairs viz. us dollars (USD), Euro (EUR), nice Britain Pound (GBP) and Japanese Yen (JPY). Currency options area unit presently available on United States dollars.