Future & Options (Derivative Market)

What are Derivatives?

  • Derivatives have no independent value
  • The value is derived from underlying asset
    Example: A derivative of ITC share will derive its value from the share price (current market price) of ITC
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  • The underlying asset could be index, stock, commodities bullion or currency
  • Derivative contract is priced separately based on the underlying asset


Advantages of Derivatives

  • It acts as a good hedging tool against price volatility.
  • You can take a high exposure on a stock or security by paying a small margin.
    Example: If the stocks are priced at Rs 10 lakh and you have only Rs 2 lakhs in hand, this product will still help you take a position.
  • It offers huge time leverage, which is a big plus for traders who do margin trading.

Types of Derivatives

  • The owner has the obligation to buy or sell a contract at a pre-defined time and price. Conditions are standardized
  • The owner has the option to buy or sell something at a pre-defined price and time.

Understanding Futures

It is a contract to buy / sell pre-defined quantities of an instrument at a specified price and time. Future contract has standardized conditions such as price, quantity and time. The owner of the contract has the obligation to buy or sell in future. Price is determined by supply and demand factors in secondary market. Index futures was the financial derivatives.

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