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Derivative Market

K.Devanadhen Assistant Professor in Commerce Directorate of Distance Education Annamalai University

Derivatives
It is a financial instrument which derives the value from some underlying asset The underlying asset can be Equity, commodities, bullion, currency, live stock or anything else It also derive their names from their respective underlying asset.

Origin of Derivative
Japan in1650 Chicago Board of Trade in 1840 India in June 2000

Types of Derivatives
Forwards Futures Options

Forwards
A contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. It is private contracts and their terms are determined by the parties involved.

Futures
It is an agreement between two parties to buy or sell an underlying asset at a certain time in the future for a certain price that is agreed upon today. traded on a recognized stock exchange

Forwards Vs Futures
Forwards
Privately negotiated contracts Not standardized Settlement dates can be set by the parties High counter party risk

Futures
Traded on an exchange Standardized contracts Fixed settlement dates as declared by the exchange Almost no counter party risk

Options
A contract between buyer and seller, which gives right, but not the obligation, to buy or sell the underlying asset on specific day at an agreed price. The party granting the option collects a payment from the other party. This payment collected is called the premium or price of the option.

Types of Options
Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A Put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. American option: options that can be exercised at any time upto the expiration date European option: options that can be exercised only on the expiration date.