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| Derivatives |
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Derivative contracts are those contracts, which derive their value from the market price of the
underlying stock. There are two types of derivatives in Indian stock market i.e. futures and options
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| Futures |
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Futures are derivative contracts to buy or sell a specified quantity or underlying assets at an agreed price,
on or before a specified time. They are standardized forward contracts, which are traded on the exchanges mainly
BSE & NSE. Since they are traded on the exchange on electronic platform, it provides them transparency,
liquidity, anonymity of trades, and also eliminates the counter party risk due to guarantee provided by the
exchange. Derivative market is a leverage market since Investor/Trader has to pay only fraction of total value
of the contract as a margin to his broker, who in turn has to pay to the exchange, for e.g. if Rs. 100/- is
required to be deployed in cash market for taking a delivery the same stock if available in derivatives market
can be bought by paying an average margin of around 15%.
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Advantages of Derivatives
- The major advantage of derivatives is their versatility. An investor can use derivative in a most conservative to most riskiest manner as his risk profile dictates.
- High Leverage : Derivative contracts enables the investor to take an exposure to the full value of underlying shares for a fraction of its value in the form of margin.
- High Liquidity : Derivative contracts offers very high liquidity compared to cash market.
- Speculation : One can take a view of the market and buy or sell derivatives accordingly at a fraction of a total cost.
- Hedging : It reduces the risk associated with market exposure by taking a counter position in the derivatives market.
- Arbitrage : It offers an opportunity to take an advantage of the price difference between the derivatives market and the cash market.
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| This segment can provide opportunity for Arbitrage & Speculation for momentum players in the equity market. |
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