What are derivatives?
Welcome to the derivatives world with DerivativesPro. Derivatives market provides an exciting opportunity for an investor to invest and hedge their risk in a professional manner, generate incomes over and above dividends, increase your returns on you investments.
Financial derivatives are used for two main purposes primarily to hedge investments and secondly speculate but generally it may be observed that retail investor uses it for speculative purposes and ends up incurring losses. A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. 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.
Derivatives can be traded privately (over-the-counter, OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counter party than do standardized derivatives.
We are dealing with exchange traded derivatives the exchange traded derivatives are classified under the following categories :
- Index Futures, Index Options
- Stock Futures, Stock Options
- Options are further divide as:
3.1 Call Option- Right to Buy
3.2 Put Option- Right to Sell
The options traded in India on National Stock Exchange(NSE) and Bombay Stock Exchange (BSE) are of European style, which means that the option can be exercised on the expiry day of the contract/series as against American Options which can be exercised any time during the tenor of the contract that is till the expiry date of the contract. The expiry day on NSE and BSE is the last Thursday of the month.
Due to the unique features of Option Contract it becomes a very useful financial instrument in hedging the market risk.