EXPLAIN Derivatives - (Derivatives Segment Of The Secondary Market)

Posted on 22-10-2015        By ADMIN

EXPLAIN Derivatives - (Derivatives Segment Of The Secondary Market) CS EXECUTIVE SECURITY LAW NOTES A derivative is a financial instrument that derives its value from the value of an underlying asset. The underlying asset can be equity, commodities or any other asset. For the purpose of this chapter, we would restrict the scope to Equity derivatives only. Derivatives were introduced in the Indian stock market to enable investors to hedge their investments against adverse volatile price movements. However they are now commonly being used for taking speculative positions Broadly, Futures and Options are the derivative instruments that are traded on the two main exchanges, BSE and the NSE. Futures: - To understand the term better, let’s take an example. Nifty is trading at the level of 4000. You can buy or sell a lot of Nifty Fututres. The lot size of Nifty futures is 100. You would be required to pay a margin of 10% of the contract value. The margin money would work out as follows: - Transaction value: 4000 × 100 (lot size) = Rs. 4,00,000 Margin Amount: 10% of 4,00,000 = Rs.40,000 The lot size and margin money percentage vary for different scrips and contracts. We took the example of Nifty, which is an index. You can take positions in various stocks which are listed for Futures trade. On NSE, the last Thursday of every month is the expiry date. In our example, if the Nifty is trading at 4300 on the last Thursday of the month and the position is not squared off then the purchaser of the Nifty futures contract at 4000 would be a gainer by Rs.20,000 (200 × lot size100). Similarly seller of Nifty futures contract would stand to lose Rs. 20,000.

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