Derivatives are financial contracts that acquire their value from an underlying assets.
Which can be Commodities, Stocks, Currencies, Indices, the Rate of interest, or Exchange rates. Which helps you make profits by put money on the future value of the underlying assets So, That the value is acquire from the underlying asset. Which called ‘Derivatives’.
To know this market you should have knowledge of Stock, Commodity or Currency market. In a stock market we trade in stocks by choosing valuable companies and selling and buying their stocks to making profit in the market.
But in a derivative market rather than stocks directly we trade futures and options contracts which acquires their value from the different Stocks, Indices or Commodities. So, when we are trading in derivatives market the stocks which we directly purchased in stock market became the underlying assets and the contracts which we traded acquired their value from stock’s current value.
TWO TYPES OF CONTRACTS BEING TRADED IN DERIVATIVE MARKET.
Futures Contracts :- Futures are the contracts which gives buyer a right but not obligation to buy an underlying asset (stock, commodity etc.) in future at a price decided today. For example :- if I have predicted that Nifty will reach 7,500 after a month and today it is at 7,000 points, I can enter a futures contract with a futures seller to buy 1 Lot (70 Units) of Nifty after a month at 7,300. So, if Nifty actually reaches 7,500 after a month then seller needs to sell it to me at 7,300 which means I am in profit of 200 x 70 units. The Futures are bought by not paying the whole value but only a limited amount of premium. If Nifty goes lower than 7,000 then the seller of Futures contract is in profit and he/she gets to keep the premium put by the buyer. A Futures buyer need to refill the account each day if he/she is going in loss to keep the contract alive.
Options Contracts :- Options are also contracts which grant users to buy or sell call and put options. A call option is bought when the prices are expected to rise and a put option is bought when the prices are expected to fall. A call option is sold when the prices are expected to fall and put options are sold when the prices are expected to rise. In Options there are no obligations to fill a loss making contract each day.
BENEFITS OF DERIVATIVES
Strategic Based Trading
Reduce Transaction Costs
Improve Market Efficiency
Offers High Return
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