What is a derivative?
A derivative is a financial contract between two parties that derives its value from an underlying asset,
such as a stock, commodity, or currency. In other words, it's a bet on the future price of an asset.
How can a derivative come to a trader’s rescue?
- Hedging : Futures, options & other derivative products are used to minimize overall risk either on a
portfolio or derivative position.
- Speculation : Since the derivative is a leveraged product, traders find it very cost-effective to trade. Just
because with the lesser amount of capital they can trade & maximize the returns. However, it is
sometimes risky also if the market goes against your position.
- Arbitrage : This is a common but a near to risk free strategy. Traders do arbitrage between Spot to
futures & earn a risk free profit.
In India financial Derivatives are more popular. Let us have a look at what those are.
Index
Derivatives on Nifty & Bank Nifty are very popular in India. The majority of derivatives
volume on Indian exchanges is contributed by these two products.
Stocks
Futures & options on stocks are popular too. Mostly the stocks of Nifty 50 are very
active and volume contributors.
Currencies
Major currency pairs like USDINR, and EURINR are active contracts on Indian exchanges.
Exporters & importers having foreign exchange exposure can hedge and minimize the
currency risk arising out of currency fluctuations.
Commodities
In India precious metals are very popular on commodities derivative Exchanges. Metals
like Gold & silver are highly traded.