Why use derivative trading
Derivatives are essential for the financial organization as they facilitate to hedge adjacent to the risk and also offer you with an opportunity to profit from the incongruity in the market. Various derivative contracts in derivative trading comprise a noteworthy share of all the financial market dealings in the domestic as well as global markets. In India, derivative trading on National Stock Exchange (NSE) is on gigantic scale and their trade is becoming increasingly widespread even on Bombay Stock Exchange (BSE). Derivative products are structured in manner so as to curtail the risk exposure of an investor.
The primary objective of any investor is to maximize gains, but since he is dealing in the Indian Capital his dealings are always attached with a certain amount of risk. The nature of an investor is such that he is not at all ready to take risk, but then again he also wants high returns. A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. In derivative trading, derivatives are contacts that originated from the need to minimize the risk that is attached to the dealings. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another a common misconception is to refer to derivatives as assets. This is erroneous, since a derivative trading is incapable of having value of its own.
For the derivatives trading mainly three kinds of participants are necessary. They are the hedgers, the speculators and the arbitrageurs. All three must co-exist. A hedger is risk averse. In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectorial indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. Broadly in India there are two types of derivative trading available:-
INDEX FUTURE
Index futures and stock options are instruments that allow you to hedge your portfolio or open positions in the market Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.
OPTIONS
Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.
Options are of two basic types: The Call and the Put Option
A call option gives the holder the right to buy an underlying asset by a certain date for a certain price. The seller is under an obligation to fulfill the contract and is paid a price of this which is called "the call option premium or call option price".
A put option, on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price. The buyer is under an obligation to fulfill the contract and is paid a price for this, which is called "the put option premium or put option price"
The primary objective of any investor is to maximize gains, but since he is dealing in the Indian Capital his dealings are always attached with a certain amount of risk. The nature of an investor is such that he is not at all ready to take risk, but then again he also wants high returns. A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. In derivative trading, derivatives are contacts that originated from the need to minimize the risk that is attached to the dealings. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another a common misconception is to refer to derivatives as assets. This is erroneous, since a derivative trading is incapable of having value of its own.
For the derivatives trading mainly three kinds of participants are necessary. They are the hedgers, the speculators and the arbitrageurs. All three must co-exist. A hedger is risk averse. In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectorial indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. Broadly in India there are two types of derivative trading available:-
- Index future/stock future
- options
INDEX FUTURE
Index futures and stock options are instruments that allow you to hedge your portfolio or open positions in the market Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.
OPTIONS
Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.
Options are of two basic types: The Call and the Put Option
A call option gives the holder the right to buy an underlying asset by a certain date for a certain price. The seller is under an obligation to fulfill the contract and is paid a price of this which is called "the call option premium or call option price".
A put option, on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price. The buyer is under an obligation to fulfill the contract and is paid a price for this, which is called "the put option premium or put option price"
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