Derivative Market in India

Topics: Futures contract, Derivatives / Pages: 18 (4259 words) / Published: Feb 20th, 2010
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

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