Derivatives

A Derivative is a financial instrument which derives its value from some other financial price. Derivatives can be used for-

  • Hedging
  • Leveraging
  • Speculating
  • Arbitrage Trading

A derivative contract is a contract between 2 parties which mentions about the payment terms to be followed. Derivative contracts in India can be of the following types-

  • Forward Contracts- A customized contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.
  • Future Contracts- Futures are agreement contracts that represent a set of assets to be bought or sold for a certain amount at a specified time.

    The difference between the futures and forward contract is that the latter is a standardized contract and is regulated by a regulation.
  • Options Contracts-Option Contracts are the contracts which provide the right but not an obligation to buy or sell an asset. The strike price is the price at which the derivative contract can be exercised. Options are of two types- Call Options and Put Options.
    A call option provides the right to buy a specified asset at a specified price but has no obligation to carry on this right.

    A put option provides the right to sell a specified asset at a specified price but has no obligation to carry on this right.

    An index option is a call or put option on a financial index.
  • Swaps-Swap is a derivative contract where two parties exchange financial instruments.
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