Derivative is a contract or a product whose value is derived from value of some other asset known as underlying. Derivatives are based on wide range of underlying assets. These include:
- Financial assets such as Shares, Bonds and Foreign Exchange.
- Metals such as Gold, Silver, Aluminium, Copper, Zinc, Nickel, Tin, Lead etc.
- Energy resources such as Oil (crude oil, products, cracks), Coal, Electricity,
- Natural Gas etc.
- Agri commodities such as wheat, Sugar, Coffee, Cotton, Pulses etc.
Products in Derivatives Market
A futures contract is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre-decided on the date of contract. Both the contracting parties are committed and are obliged to honor the transaction irrespective of price of the underlying asset at the time of delivery. Deal is made through an organized and regulated exchange rather than being negotiated directly between two parties.
An Option 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.
Trading in derivatives expose investor into high risk. Investor should do proper research and assess their risk appetite vis-a-vis risk involved with investing into derivatives. Trading into derivative without proper knowledge can be fatal for your financial heath.
Get proper knowledge of before starting trade into derivatives either in Equity, Commodity or Currency. Understand all risks involved and get well versed with day to day terminology used in derivative trading i.e. Contract Size, Expiry, Roll Over, Initial Margin, MTM, Short Margin Penalties etc.
Investment into derivatives is not only a risky investment and a thing for speculators. It works very fantastic for diversification and hedging of your portfolio. Adding derivatives into your portfolio not even reduces unsystematic risk it also helps to reduce systematic risk at great extend, if used proper strategy and timing of trade. So it helps to increase your return with reduced risk.