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DERIVATIVES

Derivatives are sophisticated financial products that derive their value from another underlying asset or basket of assets, such as an index, or a reference value such as interest rate. The value of the derivative instrument driven by the current price of the underlying asset, which can be equity, foreign currency, commodity or any other asset. Derivatives deriving value from equity is traded on the Equity derivatives market.

The derivatives market performs a number of economic functions like:

>Instruments are used to transfer risk exposure between two parties

>Derivative trading facilitates in the price discovery of the security

>Allowing for participants to hedge risks associated with an asset

>Providing a secondary market for an asset, infusing more volume into its daily trading

>Protection of investor positions help in improving savings and investment levels in the future

The participants in a derivatives market

>Hedgers use derivative instruments to lower the risk associated with the price of a particular security.

>Speculators utilise derivative contracts to leverage their speculative actions with a small initial outlay. This potentially amplifies their profits/losses from the asset.

>Arbitrageurs use derivative markets to benefit from temporary price differences arising out of asset pricing being in two different markets. It allows for them to exploit these short term differences and close the pricing gap between the two markets.

TYPES OF DERIVATIVES

Forwards

Forwards are customized contracts between two parties who agree to buy and sell an underlying asset / basket of assets to each other at a particular price on a future date.

Warrants

Warrants are special type of long term options that allow the holder to buy a particular security at pre-decided price in the future before its expiration date. A warrant generally has a long maturity period.

LEAPS

Long Term Equity Anticipation Securities (LEAPS) are basically long-term options on a selected number of securities. The long-term maturity of the options exposes the involved parties to a greater degree of risk from price movements, providing for a possibility of a much higher profits.

Baskets

Basket Options are options on a basket of securities or a particular index like Nifty or Bank Nifty. The options are priced on difference from the strike price from the notional value of the underlying index

Options

Options are contracts which give the buyer of the contract the right to buy or sell an asset a particular price. There are two types of options - A Put Option and A Call Option. A put option is contract between two parties wherein the seller is obligated to buy a particular underlying asset on a future date from the buyer of the contract. The buyer is not obligated to but has a right to exercise the contract. A call option allows the buyer of the contract with a right to buy a particular underlying a pre-decided price in the future from the seller of the contract.

Futures

Futures are financial instruments which serves as a contract between two parties to buy and sell a particular underlying asset, or index at a particular price at a later point in time in the future. Future contracts are essentially standardized forward contracts which are traded on the exchange, and not customized as per the needs of the transaction.

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.