And futures exchange

Derivatives and futures market

A: A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.

Let us try and understand a Derivatives contract with an example:
A: Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800.

As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty.

What are the different types of Derivatives? A: Derivatives are basically classified into the following:
Futures /Forwards

Options

Swaps

What are Futures? A: A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.

Case1:

Ravi wants to buy a Laptop, which costs Rs 50, 000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today.However, he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50, 000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery.

Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into.

What are Index Futures? A: As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.

What is meant by Lot size? A: Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scrip.For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures, the value would be 100*Nifty Index Value at that point of time.

Yield Hunters' New Tune Echoes Financial Engineering's Past  — Wall Street Journal
And fresh geopolitical angst is again pushing yields lower on benchmark government debt. All this creates incentives for financial engineering.

Popular Q&A

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What are Futures Markets?

Futures markets are where commodities and futures contracts are bought and sold. With a wide range of costs and variables, the futures market is one of the most popular day trading markets. However, the futures market is also risky and complicated, so before you get involved in such investing, it's important to have a basic understanding of how the futures market works.

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