The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon an underlying asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity. Today, around the world, derivative contracts are traded on electricity, weather, temperature and even volatility.
According to the Securities Contract Regulation Act, (1956) the term “derivative” includes: 1. A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; 2. A contract which derives its value from the prices, or index of prices, of underlying securities. A derivative is a financial contract whose value is derived from the value of something else, such as: - stock price, commodity price, an exchange rate, or an index of price. A derivative enables a trader to Hedge himself from the risk by taking “long or short” position in the derivative market as per their expectations regarding future. A derivative also enables a speculator to speculate in the derivative market for a large amount of money by depositing a certain percentage of money as margin amount, so as compared to spot market derivative market provide more amount of exposure to the trader and he/she is having more chances to earn large amount of money. In India, most derivative users describe themselves as hedgers and Indian law require the derivative to be used for hedging purpose only. Participant in the Derivative Market :-
1.) Hedgers: use futures or options markets to reduce or eliminate the risk associated With price of an asset. 2.) Speculators: use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. 3.) Arbitragers: They take positions in financial markets to earn riskless profits. The arbitrageurs take short and long positions in...