What is Derivative?

• The term derivative stands for a

contract whose price is derived from
or is dependent upon an underlying
assets. It could be anything like
currency, stock or any commodities.
 Types of Derivatives

Derivatives

Forward Future Options Swap

 Forward Contract
• A forward contract is a private agreement
between two parties giving the buyer an
obligation to purchase an asset (and the seller
an obligation to sell an asset) at a set price at
a future point in time. It is OTC contract
 Future Contract
• A futures contract is a legal agreement to buy
or sell a particular commodity or asset at a
predetermined price at a specified time in
the future. Futures contracts are standardized
for quality and quantity to facilitate trading on
afutures exchange. It is Exchange Traded
Contract
 Difference between future and
forward
Future Forward

Transparent Uncontrolled

Regulated Unregulated
 Option Contract
• An options contract is an agreement between
a buyer and seller that gives the purchaser of
theoption the right to buy or sell a particular
asset at a later date at an agreed upon
price. Options contracts are often used in
securities, commodities, and real estate
transactions
 Types of Option Contract
• Options are of two types-calls and put.
• Calls give the right but not the obligation to
buy a given quantity of underlying assts,at a
given price on or before the given future date.
• While Puts the give the buyer the right not the
obligation to sell a given quantity of the
underlying assets at a given price on or before
a given date.
 Swaps
• Swaps are private agreements between two parties to
exchange cash flows in the future according to a
prearranged formula. They can be regarded as
portfolios of forward contracts.
• The two commonly used swaps are:
a) Interest rate swaps: These entail swapping only the
interest related cash flows between the parties in the
same currency.
b) Currency swaps: These entail swapping both principal
and interest between the parties, with the cash flows in
one direction, being in a different currency, than those in
the opposite direction.
 History of Derivative Market in India
• Commenced on June 12th 2000 with Futures Trading
• Subsequent trading in index options and options on
individual securities commenced on June 4, 2001 and
July 2, 2001.
• NSE : largest Derivatives exchange in India.
• The derivatives contracts have a maximum of 3-month
expiration cycles, except for a long dated Nifty Options
contract which has a maturity of 5 years.
• Three contracts are available for trading, with 1
month, 2 months and 3 months to expiry.
• A new contract is introduced on the next trading day
following the expiry of the near month contract.
 Economic Function of Derivative
Market
• Help in discovery of future as well as current prices.
• Helps to transfer risks from those who have them but
do not like them to those who have an appetite for
them.
• With the introduction of derivatives, the underlying
market witnesses higher trading volumes.
• Speculative trades shift to a more controlled
environment in derivatives market. In the absence of
an organized derivatives market, speculators trade in
the underlying cash markets.