A derivative is a financial instrument which measures the value of an underlying assets. The value is depending on market conditions. Most common derivatives are forwards, futures, options and swaps.
Hedgers, speculators, margin traders and arbitrageurs participates in derivatives market.
Derivative categories are as follows −
Some of the advantages of derivatives are as follows −
Some of the disadvantages of derivatives are as follows −
Derivatives used in India are as follows −
Forward contracts − Two parties made an agreement to buy/sell its underlying asset on particular date at an agreed priced in future.
Future contracts − is an agreement to buy or sell an underlying asset at a specific price on a future date.
Option contracts − These contracts does not give obligation to buy or sell an underlying asset. These are sub classified into two types.
Call − Call means the buyer can buy underlying asset at a specific price after entering into contract.
Put − Put means, the buyer can’t sell the underlying asset at a specific price after entering into contract.
Swap contracts − Parties can exchange their cash flows in future with predetermined formula.