Derivatives

Derivative

What Does Derivative Mean?

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Investopedia explains Derivative

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros

Equity Derivatives in India - An Overview

Derivatives Markets

Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and the those traded one to one or ‘over the counter’. They are hence known as

• Exchange Traded Derivatives

• OTC Derivatives (Over The Counter)

OTC Equity Derivatives

• Traditionally equity derivatives have a long history in India in the OTC market.

• Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai

• The SCRA however banned all kind of options in 1956.

Derivative Markets today

• The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than...