Heard about stock market derivatives? Derivatives meaning in share market is “financial instruments whose value depends on an underlying asset”. They are traded in the derivatives market. Derivative trading involves buying or selling these instruments. Types of derivatives in the derivatives market include futures and options trading, equity derivatives, currency derivatives, and share market derivatives. Derivatives apps offer tools for derivatives market trading.
Here are some of the common questions on types of derivatives in India:
What Are Derivatives In Finance
Derivatives in simple terms are contracts between individuals or parties. Common types of derivatives include:
- Futures contracts: Agreements to buy or sell a specific asset at a predetermined price on a future date.
- Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period.
- Swaps: Agreements to exchange one stream of cash flows for another.
- Forwards: Similar to futures contracts, but typically customised agreements between two parties.
Derivatives are used for various purposes, including hedging, speculation, and arbitrage. Brokerage charges related to trading in these derivatives should be compared before demat account opening.
What Are Currency Derivatives
Currency derivatives are financial instruments whose value is derived from the price fluctuations of two different currencies. They are widely used in India to hedge against currency risk or to speculate on currency movements.
Common types of currency derivatives in India include:
- Currency Futures: Contracts that obligate the buyer to purchase a specific amount of a foreign currency at a predetermined price on a future date. These are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
- Currency Options: Contracts that give the buyer the right, but not the obligation, to buy or sell a specific amount of a foreign currency at a predetermined price within a specified time period. These are also traded on the NSE and BSE.
- Currency Swaps: Agreements to exchange one currency for another at a predetermined exchange rate. These are typically traded over-the-counter (OTC).
What Are The Types Of Forex Derivatives Strategy
Forex derivatives strategies offer Indian investors opportunities to profit from currency fluctuations. Hedging strategies like currency hedging and interest rate parity help manage risks, while speculative strategies like carry trades, range trading, momentum trading, and mean reversion aim to capitalise on price movements.
Option strategies like bullish call spreads, bearish put spreads, and straddles provide flexibility in managing risk and potential returns. However, forex trading involves risks, and investors should carefully consider their objectives and risk tolerance before investing.
What Are Derivatives And Its Types In Detail With Example
As discussed earlier, stock market derivatives are financial instruments whose value is derived from the value of an underlying asset. This underlying asset can be anything from a stock, bond, commodity, or currency.
Here are the broad types:
Futures Contracts
Futures contracts are agreements to buy or sell a specific asset at a predetermined price on a future date. For example, a wheat futures contract would obligate the buyer to purchase a certain amount of wheat at a specified price on a specified date. Futures contracts are often used to hedge against price fluctuations or to speculate on price movements.
Options
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. There are two main types of options in trading:
- Call options: Give the holder the right to buy the underlying asset at the strike price.
- Put options: Give the holder the right to sell the underlying asset at the strike price.
For example, a call option on Apple stock would give the buyer the right to purchase Apple stock at a specified price on or before a specified date. Options are often used to hedge against price risk or to speculate on price movements.
Swaps
Swaps are agreements to exchange one stream of cash flows for another. There are several types of swaps, including:
- Interest rate swaps: Involve the exchange of fixed-rate interest payments for floating-rate interest payments.
- Currency swaps: Involve the exchange of principal amounts in two different currencies at the beginning of the swap and the exchange of interest payments in those currencies throughout the life of the swap.
- Commodity swaps: Involve the exchange of cash flows based on the price of a commodity.
Swaps are often used to manage risk or to speculate on market movements.
Forwards
Forwards are similar to futures contracts, but they are typically customised agreements between two parties. They are often used to hedge against price risk or to speculate on price movements.
These are just a few examples of the many types of derivatives that exist. Derivatives can be complex financial instruments, and it is important to understand the risks involved before investing in them.
You can learn about and implement all these derivatives strategies with the help of a Demat app.
What Commonly Used Swaps In Derivatives Markets Are Available In India
Here are some of the most commonly used swaps:
Interest Rate Swaps
- Plain Vanilla Interest Rate Swap: The most basic type of swap, involving the exchange of fixed-rate interest payments for floating-rate interest payments.
- Basis Swap: A swap where the underlying rates are different, such as a 3-month LIBOR for a 6-month LIBOR.
- Pay-for-Fixed Swap: A swap where one party pays a fixed rate and receives a floating rate.
- Receive-for-Fixed Swap: A swap where one party receives a fixed rate and pays a floating rate.
Currency Swaps
- Currency Swap: Involves the exchange of principal amounts in two different currencies at the beginning of the swap and the exchange of interest payments in those currencies throughout the life of the swap.
Commodity Swaps
- Commodity Swap: Involves the exchange of cash flows based on the price of a commodity. For example, a company that produces oil might enter into a swap to exchange its physical oil production for a fixed price.
Credit Default Swaps (CDS)
- CDS: A credit derivative that transfers the credit risk of a specific entity from one party to another. It is often used to hedge against the risk of default on a bond or loan.
Equity Swaps
- Equity Swap: Involves the exchange of equity returns for fixed or floating interest payments.
But that’s not all about the types of derivatives market and strategy types. There are several questions to answer, such as these:
- What are derivative instruments?
- What are mutual fund investing in derivatives examples?
- Which is the best derivatives app?
You can learn more about these and more on the internet and by using the derivatives app.
Conclusion
Derivatives in India offer a diverse range of financial instruments, including equity derivatives, commodity derivatives, currency derivatives, and interest rate derivatives. These instruments are traded on various exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Derivatives are used for various purposes, including hedging, speculation, and arbitrage. However, they also involve significant risks, and investors should carefully consider their investment objectives and risk tolerance before trading derivatives.
