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A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues to have jurisdiction over commodity forward/ futures contracts.
The Securities Contracts (Regulation) Act, 1956 defines 'derivative' to include -A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities.
All are the product of derivative market. Forward is a part of OTC market, future & option is a exchange trade based.
Hedgers face risk associated with the price of an asset because hedger used derivative market only to bear their loss which he earned in different market (capital & physical market).
Arbitragers work in two different market or with option strategy for example, they see the futures price of an asset getting out of line with the cash price, they would take offsetting positions in the two markets to lock in the profit.
Futures and options contracts can give them leverage; that is, by putting in small amounts of money upfront, they can take large positions on the market. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.
The primary intention of the CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went one step further and listed the first 'exchange traded' derivatives contract in the US, these contracts were called 'futures contracts'. In 1919, Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow futures trading.
Forward is a OTC market where two parties get into the trade. This is a customized product which have no settlement trade guarantee.
Option have two components such as CALL & PUT. CALL means bullish view or PUT means bearish view.
Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts.
Warrant is not a trading product , it just a example of type of option which is not traded in OTC or exchange market.
Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for prearranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest.
The first stock index futures contract was traded at Kansas City Board of Trade. Currently, the most popular stock index futures in the world is based on S&P 500 index, traded on Chicago Mercantile Exchange.
Forward contracts to explain pricing concepts because forward contracts are easier to understand. However, the logic for pricing a futures contract is exactly the same as the logic for pricing a forward contract. We begin with a forward contract on an asset that provides the holder with no income and has no storage or other costs.
Under, EXCHANGE TRADE MARKET exchange give guarantee for trade settlement which can be done only when buyer and seller agreeing upon a price.
Derivatives markets help increase savings and investment in the long run. The transfer of risk enables market participants to expand their volume of activity.
Clearing & settlement done on the rolling basics means first step is trading after that next step is Clearing & settlement which is done by exchange.
Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century and may well have been around before then. These contracts were typically OTC kind of contracts. Over the counter (OTC) derivatives are privately negotiated contracts.
Basket options are options on portfolios of underlying assets. The underlying asset is usually a weighted average of a basket of assets. Equity index options are a form of basket options.
Gold is a part of commodity derivative market which is traded on MCX or NCDEX
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