Derivative Market in India

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The derivatives markets are the financial markets for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both What Are derivatives:-

In most cases derivatives are contracts to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined today. The contract may bind both parties, or just one party with the other party reserving the option to exercise or not. The underlying asset either has to be traded or some kind of cash settlement has to transpire. Derivatives are traded either in organized exchanges or over the counter. Examples of derivatives include forwards, futures, options, caps, floors, swaps, collars, and many others.


What are the advantages of trading in derivatives?
Derivative contracts are effective tool for hedging and thereby reducing the potential of future risk. They also allow investors to take a leveraged position in the market and hereby increase the possibilities of earning higher returns.


What are the disadvantages of trading in derivatives?
Because of their ability to provide leveraging, derivative disasters are pretty common in international markets. Just as there is huge potential of earning higher returns, it also exposes individuals and corporations alike to lose money in case the market moves against the positions held by them.

What is risk management of derivatives in India?
Stock exchanges follow robust risk management measures for derivative trading. These include, initial base minimum capital requirements, margins and daily mark to market margin system and initial Value at risk (VAR) based margin system. Apart from that there are various position limits, broker wise limits and scrip wise limits also to avoid build up of huge positions.

Who monitors derivative trading in securities market?
Derivative trading in India is very well monitored by the stock exchanges (NSE has a pre dominant position as far as derivative trading is concerned compared to BSE) Besides SEBI also monitors the derivative through appropriate policy measures.

Why SENSEX Futures
There are many reasons why SENSEX® futures makes sense:
SENSEX as compared with other indices shows less volatility and at the same time gives returns equivalent to the returns given by the other indices. SENSEX is widely used to describe the mood in the Indian stock market. Because of its long history and wide acceptance, no other index matches the BSE SENSEX® in reflecting market movements and sentiments and it makes an attractive underlying for index-based products like Index Funds, Futures & Options and Exchange Traded Funds. SENSEX is truly investible as it is the only broad based index in India that is "free float market capitalization weighted", which reflects the market trends more rationally and takes into consideration only those shares that are available for trading in the market. It may be noted that in addition to the SENSEX, five sectoral indices belonging to the 90/FF series are also available for trading in the Futures and Options Segment of BSE Limited. The term '90 /FF' means that the indices cover 90% of the market capitalisation of the sector to which the index belongs and is thus well representative of that sector. Also, FF stands for free float - i.e. the indices are based on the globally followed standard of free float market capitalisiation methodology. The five sectoral indices that are presently available for F&O are BSE TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE Oil & Gas. Eligibility

The eligibility criteria to determine...
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