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DERIVATIVES

Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. The price of this derivative is driven by the spot price of the "underlying".

The need for a derivatives market The derivatives market performs a number of economic functions:

>They help in transferring risks from risk averse people to risk oriented people

>They help in the discovery of future as well as current prices

>They catalyze entrepreneurial activity

>They increase the volume traded in markets because of participation of risk averse people in greater numbers

>They increase savings and investment in the long run

The participants in a derivatives market

>Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset.

>Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture.

>Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

TYPES OF DERIVATIVES

Forwards:

A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts

Options:

Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Warrants:

Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

LEAPS:

The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years.

Baskets:

Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.

This section will give you meaningful information about the most active contracts, calls and puts, volume data, latest quotes, historical data, FII statistics, etc. This section is particularly designed to help F&O traders and to keep them updated about the latest event in derivatives market.