Derivatives are now today popularly being traded in India. These are those financial instruments that drive their values from their respective underlying assets. As derivative worth is determined by underlying assets they are popularly used to hedge against fluctuations.
Mainly four different derivatives type are traded in the stock market. These include future, forward, option, and swap. However, swaps are not traded in the Indian market as these are complex instruments. These are explained as below:
- Future and Forward Contract: Future and Forward are the most common type of derivative contracts. The futures contracts are standardized and are traded on the exchange and are highly uniform in quantity and price. Under the future contract, the clearing takes place with the help of the clearing house because of which default risk is eliminated. Also, there is a need to deposit margin under future contracts. Future contracts are governed and properly regulated by SEBI in India. Whereas a forward contract is a customized contract that is agreed between two parties and is traded over the counter. Thereby the price and date can be easily changed or made adjustments to under these contracts to meet the requirement of both parties. These contracts are self-regulated and thereby there exists no secondary market for these contracts. They do not require any collateral. The counterparty risk under the forward contract is high. As these contracts are tailored made it becomes a challenge to find the parties that have the same requirements.
- Options Contracts: Option is another very important part of a derivative contract. There exist two types of options i.e., call and put options. The option is different from future and forward contracts as these do not pose any obligation for buying or selling of derivative rather one is given the option to perform the contract. The buyer under the option has the right to fulfill the derivative contract. Under this buyer and seller agree to trade the commodity at a determined future price and date. At the time of maturity, the buyer will decide whether to opt for performing the contract or not. Options can be traded both over the counter as well as in exchange.
- Swaps: Under the swap, the derivative agreement is made between two parties for exchanging cash flow in the future. The most popular swap contracts are interest rate swaps and currency swaps. These contracts are not traded on exchange rather over the counter between the financial institutions.
Hence, these are the main types of derivatives that are traded all over the world. These instruments are known to best hedging instrument against inflation and thereby helps the investor in making a good profit out of it. To trade in these one must seek the right platform that will be providing them with the required guidance. It could be done with the help of 5paisa. 5paisa is a trusted brokerage platform that will make it easier for trading in different derivative contracts. Thus, one must connect with them as soon as possible.