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DERIVATIVE

Futures

You can now trade in index and stock futures on the BSE. In futures trading, you take buy/sell positions in index or stock(s) contracts having a longer contract period of up to 3 months.

Trading in FUTURES is simple! If, during the course of the contract life, the price moves in your favour (i.e. rises in case you have a buy position or falls in case you have a sell position), you make a profit.

Presently only selected stocks, which meet the criteria on liquidity and volume, have been enabled for futures trading.

Calculate Index and Know your Margin are tools to help you in calculating your margin requirements and also the index & stock price movements. The Crecer Learning Centre is a comprehensive guide on futures and options trading.

OPTIONS

An option is a contract, which gives the buyer the right to buy or sell shares at a specific price, on or before a specific date. For this, the buyer has to pay to the seller some money, which is called premium. There is no obligation on the buyer to complete the transaction if the price is not favorable to him.

To take the buy/sell position on index/stock options, you have to place certain % of order value as margin. With options trading, you can leverage on your trading limit by taking buy/sell positions much more than what you could have taken in cash segment.

The Buyer of a Call Option has the Right but not the Obligation to Purchase the Underlying Asset at the specified strike price by paying a premium whereas the Seller of the Call has the obligation of selling the Underlying Asset at the specified Strike price.

The Buyer of a Put Option has the Right but not the Obligation to Sell the Underlying Asset at the specified strike price by paying a premium whereas the Seller of the Put has the obligation of Buying the Underlying Asset at the specified Strike price.

By paying lesser amount of premium, you can create positions under OPTIONS and take advantage of more trading opportunities.


A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

1. Enable Price Discovery:

Derivatives encourage more and more people with objectives of hedging, speculation, arbitrage to take part in the market and hence increase competition. Hence there are more and more people who keep track of prices and trade on slightest of reasons. Individuals with better information and judgment are inclined to participate in the markets to take advantage of such situation. A small change in price and it attracts some action on the part of speculators. Active participation in the market in large no.s of both buyers and sellers ensures a fair price. The increased no. of participants, more trades, more volumes, and greater sensitivity to smallest of price changes facilitates correct and efficient price discovery of assets.

2. Facilitates Transfer of Risk:

By their very nature, the derivatives instruments do not involve risk. Instead, they redistribute risk between the various market participants. In this sense, derivatives can be compared to insurance: provides means to hedge against unfavorable market movements in return for a premium, and provides opportunities to those who are willing to take risks and make profits in the process.

3. Provide Leveraging:

In order to take position in derivatives, you require very small initial outlay of capital in comparison to taking position in the spot market. Derivatives provide those exit routes by letting one enter into a contract and can neutralize their position by booking opposite position on a future date.

4. Completion of Market/Efficient Market:

A market is efficient or said to be complete market (theoretically possible) when the available instruments can by itself or jointly provide cover against any possible adverse outcomes. It is a theoretical concept, which is not seen in practice. Though with the presence of derivatives, there is a greater degree of market completeness.

5. Lower Transaction costs:

It translates into low transaction costs due to the high no. of participants that take part in the market.

Derivatives behave like a two edged sword. If put to use wisely they work very effectively but when used recklessly can cause you severe agonies. Sadly there is no realistic way in which one could demarcate between the two. There is a very thin line that distinguishes gambling with a calculated taken risk.

How much I have to invest?