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Why is Derivatives

The value of the underlying asset is bound to change as the value of the underlying assets keep changing continuously.

Generally stocks, bonds, currency, commodities and interest rates form the underlying asset.

What is Derivatives

It is a financial instrument which derives its value/price from the underlying assets. Originally, underlying corpus is first created which can consist of one security or a combination of different securities. The value of the underlying asset is bound to change as the value of the underlying assets keep changing continuously.

 

Generally stocks, bonds, currency, commodities and interest rates form the underlying asset.

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Our step by step guide will help you through understanding the basics.

Before you invest for the first time it is important to understand the basics. We’ve put together a step-by-step guide to investments that we hope will clarify some of the broader benefits and risks.

    Advantages of Derivatives

    Derivatives are widely regarded as a tool of speculation. Due to the extremely risky nature of derivatives and their unpredictable behavior, unreasonable speculation may lead to huge losses.


    Although derivatives traded on the exchanges generally go through a thorough due diligence process, some of the contracts traded over-the-counter do not include a benchmark for due diligence. Thus, there is a possibility of counter-party default.

      Price Discovery

      Futures market prices of the assets depend on a continuous flow of information from around the world. A broad range of factors (such as climatic conditions, political situations, debt default, refugee displacement, environmental condition etc.) can influence the demand and supply of assets and thus the current and future prices of the underlying asset on which the derivative contract is based, changes the price as per the kind of information. This process is known as Price Discovery

      Risk Management

      Risk management is the process of identifying the desired (future) level of risk, identifying the actual (Present) level of risk and altering the latter to equal the former. This process is widely termed as hedging and speculation. “Hedging” is defined as a strategy for reducing the risk in holding a market position while “Speculation”is taking a position in the way the markets will move.

      It is a financial instrument which derives its value/price from the underlying assets. Originally, underlying corpus is first created which can consist of one security or a combination of different securities. The value of the underlying asset is bound to change as the value of the underlying assets keep changing continuously.

      In a forward contract, two parties agree to do a trade at some future date, at a stated price and quantity. No money changes hands at the time the deal is signed.

      Yes. Margins are computed and collected on-line, real time on a portfolio basis at the client level. Members are required to collect the margin upfront from the client & report the same to the Exchange.

      Forward contracting is very valuable in hedging and speculation. If a speculator has information or analysis which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction making a profit.

      Futures and options contracts are traded on Indices and on Single stocks.

      It is the last day on which the contracts expire. Futures and Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

      Yes. Margins are computed and collected on-line, real time on a portfolio basis at the client level. Members are required to collect the margin upfront from the client & report the same to the Exchange.

      An opening purchase transaction is one that creates or increases a long position in a given option series.

      Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardized and trading is centralized (on a stock exchange). There is no counterparty In futures markets, unlike in forward markets, increasing the time to expiration does not increase the counter party risk. Futures markets are highly liquid as compared to the forward markets.

      Forward markets worldwide are afflicted by several problems:
      (a) Lack of centralisation of trading,
      (b) Illiquidity, and
      (c) Counterparty risk.

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