Highlights Of Derivatives Market in India

Posted by Nirav Singhaniya on March 20th, 2020

There are a lot of participants who are drawn to the spot or the cash shares market in India. However, there is a bigger market that exists apart from stocks which is called the derivatives market. The turnover of derivatives market in India is much higher than that in the stock market.

If you’re considering entering the derivatives market, then you need to be aware of a few things.

Here are highlights of derivatives market in India:

What are derivatives:

Derivatives in share market are instruments that derive their value based on an underlying asset. For example, a stock option will derive its value based on the price of the stock. A commodity future, soyabean futures for example derive their value on the price of soyabean in the market at the current date and time. Some of the common types of underlying assets are:

• Shares
• Index
• Commodities
• Currencies

These derivatives are for 1 month, 2 month and 3 months expiry. These contracts expire on the last Thursday of each month.

Types of derivatives instruments:

Before you invest in derivatives, it is important to know the types of derivative instruments so that you can decide which one you would like to invest in. Once you select the derivative instrument, you can pick the investment strategy.

Forwards:

Forwards are a contractual agreement between two parties for delivery of a particular asset at a fixed price. Forwards benefit both the seller and buyer since it locks the price for delivery. This contract has to be fulfilled by both the parties. It is a non-standardised agreement and cannot be traded on the stock exchange

Futures:

Futures are standardised agreements that are traded on the stock exchange. It is similar to a forward contract except that it is standardised between the two parties. The lot size and the price is transparently available to all who do derivatives trading. It is possible to exit a forward before expiry i.e not take delivery on it.

Options:

Options give the buyer the right but not the obligation to buy or sell the underlying asset on the date of delivery. For example, if you buy an index option and you are not making any money on it till delivery, you can choose to not exercise the option and it will lapse and your loss will be restricted to the options premium you paid to buy the option. Options have a premium on it called as option premium.

Swaps:

Swaps are an agreement between two parties to exchange cash in the future based on certain pre-decided criteria. Some types of swaps are currency and interest rate swaps.

Market participants:

Primarily, there are three participants entering the derivatives market in India.

Hedgers:

Hedgers enter the derivatives market to supplement or reduce their risks on existing contracts. For example, a company with exposure to foreign exchange can enter into currency derivatives to hedge their losses against foreign currency fluctuations

Traders:

Traders enter the derivatives market to take positions on different instruments and earn a return on derivatives trading. Traders don’t necessarily stay invested in the instruments till their expiry. They may close positions whenever they earn a profit. Since traders close their open positions before expiry, there is no delivery involved.

Arbitrageurs:

Arbitrageurs are those who profit from the difference in prices between two markets. It takes a lot of technical knowledge to be an arbitrageur.

You can invest in derivatives market through a reputed stockbroker like IndiaNivesh who can help you with the backend support for your trades.