Derivatives market

PRESENTED BY-JEINI JAIN (47) HIMANSHU ALGOTAR(61)

What is a Derivative?
The term Derivative stands for a contract whose price is derived from or is dependent upon an underlying asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity. As Derivatives are merely contracts between two or more parties, anything like weather data or amount of rain can be used as underlying assets.

Need for Derivatives

The derivatives market performs a number of economic functions. They help in : Transferring risks Discovery of future as well as current prices Catalyzing entrepreneurial activity Increasing saving and investments in long run.

Participants in Derivative markets

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.

Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.

What is OTC (Over the counter)??

Over the Counter (OTC) derivatives are those which are privately traded between two parties and involves no exchange or intermediary.

Non-standard products are traded in the so-called over-the-counter (OTC) derivatives markets. The Over the counter derivative market consists of the investment banks and include clients like hedge funds, commercial banks, government sponsored enterprises etc.

Exchange Traded Market

A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.

A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee.

Classification of Derivatives

Future Contracts Forward Contracts Options Swaps

OTC (Over the counter ) trading

Exchange Traded Derivatives

Basic Terminologies
Spot Contract: An agreement to buy or sell an asset today. Spot Price: The price at which the asset changes hands on the spot date. Spot date: The normal settlement day for a transaction done today. Long position: The party agreeing to buy the underlying asset in the future assumes a long position. Short position: The party agreeing to sell the asset in the future assumes a short position Delivery Price: The price agreed upon at the time the contract is entered into.

Development of Derivatives in India:

Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts.

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