Derivaties

The derivatives market is the financial market for derivatives, financial

instruments like futures contracts or options, which are derived from other forms of
assets.
The market can be divided into two, that for exchange-traded derivatives and that
for over-the-counter derivatives. The legal nature of these products is very
different, as well as the way they are traded, though many market participants are
active in both.
Participants in a Derivative Market
Participants in a derivative market can be segregated into four sets based on their
trading motives.
Hedgers
Speculators
Margin Traders
Arbitrageurs
Futures contract
A Futures Contract is a legally binding agreement to buy or sell any
underlying security at a future date at a pre determined price. The Contract is
standardised in terms of quantity, quality, delivery time and place for
settlement at a future date (In case of equity/index futures, this would mean
the lot size). Both parties entering into such an agreement are obligated to
complete the contract at the end of the contract period with the delivery of
cash/stock. Each Futures Contract is traded on a Futures Exchange that acts
as an intermediary to minimize the risk of default by either party. The
Exchange is also a centralized marketplace for buyers and sellers to
participate in Futures Contracts with ease and with access to all market
information, price movements and trends. Bids and offers are usually
matched electronically on time-price priority and participants remain
anonymous to each other. Indian equity derivative exchanges settle contracts

on a cash basis. To avail the benefits and participate in such a contract,

traders have to put up an initial deposit of cash in their accounts called as the
margin. When the contract is closed, the initial margin is credited with any
gains or losses that accrue over the contract period. In addition, should there
be changes in the Futures price from the pre agreed price, the difference is
also settled daily and the transfer of such differences is monitored by the
Exchange which uses the margin money from either party to ensure
appropriate daily profit or loss. If the minimum maintenance margin or the
lowest amount required is insufficient, then a margin call is made and the
concerned party must immediately replenish the shortfall. This process of
ensuring daily profit or loss is known as mark to market. However, if and
ever a margin call is made, funds have to be delivered immediately as not
doing so could result in the liquidation of your position by the Exchange or
Broker to recover any losses that may have been incurred. When the delivery
date is due, the amount finally exchanged would hence, be the spot
differential in value and not the contract price as every gain and loss till the
due date has been accounted for and appropriated accordingly.
Options contract
An option is a contract that gives the buyer the right, but not the obligation, to buy
or sell an underlying asset at a specific price on or before a certain date. An option,
just like a stock or bond, is a security. It is also a binding contract with strictly
defined terms and properties.
Calls and Puts
The two types of options are calls and puts:
1. A call gives the holder the right to buy an asset at a certain price within a
specific period of time. Calls are similar to having a long position on a stock.
Buyers of calls hope that the stock will increase substantially before the
option expires.
2. A put gives the holder the right to sell an asset at a certain price within a
specific period of time. Puts are very similar to having a short position on a
stock. Buyers of puts hope that the price of the stock will fall before the
option expires.

Participants in the Options Market

There are four types of participants in options markets depending on the position
they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options are called
writers; furthermore, buyers are said to have long positions, and sellers are said to
have short positions.
BSE created history on June 9, 2000 by launching the first
Exchange-traded Index Derivative Contract in India i.e. futures on
the capital market benchmark index - the BSE Sensex. The
inauguration of trading was done by Prof. J.R. Varma, member of
SEBI and Chairman of the committee which formulated the risk
containment measures for the derivatives market.
In sequence of product innovation, BSE commenced trading in
Index Options on Sensex on June 1, 2001, Stock Options were
introduced on 31 stocks on July 9, 2001 and Single Stock Futures
were launched on November 9, 2002.
In India The five sectoral indices that are presently available for
F&O are BSE TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE Oil
& Gas.