<div align="justify">Derivatives are financial cotracts that derive their value from an underlying asset. These underlying could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest.<div align="justify"><br />Over the last few decades, derivatives market has seen a phenomenal growth. Many derivative contracts were launched at exchanges across the world. The reason of the growth was mainly because of increased fluctuations in underlying asset prices, integration of financial markets globally, enhanced understanding of market participants, sophisticated risk management tools to manage the risk and frequent innovations in derivatives markets.<br /><br />There are mainly four kind of Derivatives products:<br /><br />u Forwards: It is a contractual agreement between two parties to buy or sell an underlying asset at a certain future date for a particular price that is predecided on the date of contract. Both the parties are committed and are obliged to honour the transaction irrespective of price of the underlying asset at the time of expiry of the contract. Since forwards are negotiated between two parties, the terms and conditions of contracts are customised. These are Over-the-counter (OTC) contracts.<br /><br />u Futures: It is a contract which is similar to a forward, except that the transaction is made through an organised and regulated exchange rather than being negotiated directly between two parties.<br />u Options: It is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right, writer/seller of option receives the premium with obligation to sell/ buy the underlying asset, if the buyer exercises his right.<br /><br />u Swaps: It is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps help market participants to manage risk associated with volatile interest rates and currency exchange rates.<br /><br />There are broadly three types of participants in the derivatives market — hedgers, traders and arbitrageurs. An individual may play different roles in different market circumstances.<br /><br />u Hedgers: One who uses derivatives to reduce their risk.<br /><br />u Speculators / Traders: Those who trade in market based on their view to take positions in desired contracts.<br /><br />u Arbitrageurs: In this process, traders purchase an asset cheaply in one exchange and simultaneously sell it at a higher price in another exchange.</div><div align="justify"><br />Why to use Derivatives Leverage: As it requires some percentage of margins compare to entire value of trade.<br /><br />Liquidity: More liquid because of its leverage and low cost nature. Higher the liquidity, lesser will be impact cost for trades.<br /><br />Hedging: To protect against short-term fluctuation in prices.<br /><br />How the Derivatives trading is being conducted<br />Suppose a person buys a Futures contract of Reliance at Rs 1,250 which has the lot size of 500. A month later, the stock is trading at Rs 1,300. This means, he makes a profit of Rs 50 per share and in total Rs 25,000 per lot. Similarly, if the stock price falls by Rs 50, he will incur loss of Rs 50 per share and in total Rs 25,000 per lot. Similarly, derivatives trading can be conducted on the indices also.<br />Trading in Derivatives market<br /><br />1. First do your research or take the expert advice: This is more important for the derivatives market. Derivatives trading can be done only in available Derivatives contracts.<br /><br />2. Arrange for the requisite margin amount: Derivatives contracts are initiated by just paying the small margin and requires extra margin in the hand of traders as per the stock fluctuation.<br /><br />What are the pre requisites for Derivatives trading<br /><br />1. Trading account: This is the account through which you conduct trades. The account number can be considered your identity in the markets.</div><div align="justify"><br />2. Margin maintenance: This pre-requisite is unique to derivatives trading, when you purchase futures contracts you are required to deposit only a percentage of the value of your outstanding position, irrespective of whether you buy or sell futures. This mandatory deposit is called an initial margin.</div><div align="justify"><br />The exposure margin is used to control volatility and excessive speculation in the derivatives markets. This margin is also stipulated by the exchanged and levied on the value of the contract that you buy or sell. Besides the initial and exposure margins, one has to maintain Mark-to-Market (MTM) margins. This covers the daily difference between the cost of the contract and its closing price on the day of purchase. Thereafter, the MTM margin covers the differences in closing price from day to day.<br /><br />Options<br />Forward/futures contract is a commitment to buy/sell the underlying and has a linear pay off, which indicates unlimited losses and profits. An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying asset on or before a stated date/day, at a stated price, for a price.<br /><br />Options may be categorised into two main types :<br />Call Options: Option, which gives buyer a right to buy the underlying asset, is called Call option.<br /><br />Put Options: Option which gives buyer a right to sell the underlying asset, is called Put option.<br /><br />Derivatives can fit into a portfolio for a partial or full hedging</div><div align="justify"><br />Investors typically use derivatives for three reasons, to hedge a position, to take the advantage of high leverage or to speculate on an asset's movement. Hedging a position is usually done to protect against or insure the risk of an asset.</div><div align="justify"><br />Traders can use naked option or option strategies as per the different market view like Bullish, Bearish, Volatile or Range bound. Commonly used option strategies are Bull Call Spread, Bear Put Spread, Covered Call, Covered Put, Put Hedge, Call Hedge, Straddle, Strangle, Iron Condor, Butterfly, Strip, Strap, Ratio Spread, Calendar Spread, etc. Participants usesdifferent kind of Derivatives indicators like Open Interest, Put Call Ratio, Basis, Cost of Carry, OI Concentration, Rollover, Roll Cost, Volatility, etc. to understand the market movement.<br /><br />(The writer is Technical & Derivatives Analyst at MOSL)</div></div>
<div align="justify">Derivatives are financial cotracts that derive their value from an underlying asset. These underlying could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest.<div align="justify"><br />Over the last few decades, derivatives market has seen a phenomenal growth. Many derivative contracts were launched at exchanges across the world. The reason of the growth was mainly because of increased fluctuations in underlying asset prices, integration of financial markets globally, enhanced understanding of market participants, sophisticated risk management tools to manage the risk and frequent innovations in derivatives markets.<br /><br />There are mainly four kind of Derivatives products:<br /><br />u Forwards: It is a contractual agreement between two parties to buy or sell an underlying asset at a certain future date for a particular price that is predecided on the date of contract. Both the parties are committed and are obliged to honour the transaction irrespective of price of the underlying asset at the time of expiry of the contract. Since forwards are negotiated between two parties, the terms and conditions of contracts are customised. These are Over-the-counter (OTC) contracts.<br /><br />u Futures: It is a contract which is similar to a forward, except that the transaction is made through an organised and regulated exchange rather than being negotiated directly between two parties.<br />u Options: It is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right, writer/seller of option receives the premium with obligation to sell/ buy the underlying asset, if the buyer exercises his right.<br /><br />u Swaps: It is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps help market participants to manage risk associated with volatile interest rates and currency exchange rates.<br /><br />There are broadly three types of participants in the derivatives market — hedgers, traders and arbitrageurs. An individual may play different roles in different market circumstances.<br /><br />u Hedgers: One who uses derivatives to reduce their risk.<br /><br />u Speculators / Traders: Those who trade in market based on their view to take positions in desired contracts.<br /><br />u Arbitrageurs: In this process, traders purchase an asset cheaply in one exchange and simultaneously sell it at a higher price in another exchange.</div><div align="justify"><br />Why to use Derivatives Leverage: As it requires some percentage of margins compare to entire value of trade.<br /><br />Liquidity: More liquid because of its leverage and low cost nature. Higher the liquidity, lesser will be impact cost for trades.<br /><br />Hedging: To protect against short-term fluctuation in prices.<br /><br />How the Derivatives trading is being conducted<br />Suppose a person buys a Futures contract of Reliance at Rs 1,250 which has the lot size of 500. A month later, the stock is trading at Rs 1,300. This means, he makes a profit of Rs 50 per share and in total Rs 25,000 per lot. Similarly, if the stock price falls by Rs 50, he will incur loss of Rs 50 per share and in total Rs 25,000 per lot. Similarly, derivatives trading can be conducted on the indices also.<br />Trading in Derivatives market<br /><br />1. First do your research or take the expert advice: This is more important for the derivatives market. Derivatives trading can be done only in available Derivatives contracts.<br /><br />2. Arrange for the requisite margin amount: Derivatives contracts are initiated by just paying the small margin and requires extra margin in the hand of traders as per the stock fluctuation.<br /><br />What are the pre requisites for Derivatives trading<br /><br />1. Trading account: This is the account through which you conduct trades. The account number can be considered your identity in the markets.</div><div align="justify"><br />2. Margin maintenance: This pre-requisite is unique to derivatives trading, when you purchase futures contracts you are required to deposit only a percentage of the value of your outstanding position, irrespective of whether you buy or sell futures. This mandatory deposit is called an initial margin.</div><div align="justify"><br />The exposure margin is used to control volatility and excessive speculation in the derivatives markets. This margin is also stipulated by the exchanged and levied on the value of the contract that you buy or sell. Besides the initial and exposure margins, one has to maintain Mark-to-Market (MTM) margins. This covers the daily difference between the cost of the contract and its closing price on the day of purchase. Thereafter, the MTM margin covers the differences in closing price from day to day.<br /><br />Options<br />Forward/futures contract is a commitment to buy/sell the underlying and has a linear pay off, which indicates unlimited losses and profits. An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying asset on or before a stated date/day, at a stated price, for a price.<br /><br />Options may be categorised into two main types :<br />Call Options: Option, which gives buyer a right to buy the underlying asset, is called Call option.<br /><br />Put Options: Option which gives buyer a right to sell the underlying asset, is called Put option.<br /><br />Derivatives can fit into a portfolio for a partial or full hedging</div><div align="justify"><br />Investors typically use derivatives for three reasons, to hedge a position, to take the advantage of high leverage or to speculate on an asset's movement. Hedging a position is usually done to protect against or insure the risk of an asset.</div><div align="justify"><br />Traders can use naked option or option strategies as per the different market view like Bullish, Bearish, Volatile or Range bound. Commonly used option strategies are Bull Call Spread, Bear Put Spread, Covered Call, Covered Put, Put Hedge, Call Hedge, Straddle, Strangle, Iron Condor, Butterfly, Strip, Strap, Ratio Spread, Calendar Spread, etc. Participants usesdifferent kind of Derivatives indicators like Open Interest, Put Call Ratio, Basis, Cost of Carry, OI Concentration, Rollover, Roll Cost, Volatility, etc. to understand the market movement.<br /><br />(The writer is Technical & Derivatives Analyst at MOSL)</div></div>
