Introduction : In our present day economy, finance is defined as the provision of money at the time when it is required. Share market is of two types. They are cash market and derivative market. A stock exchange, thus imparts marketability and liquidity to securities, encourage investments in securities and assists corporate growth. Derivatives are the products whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate,) in a contractual manner. Derivatives have become vey important in the world of Finance in the last 20 years.
The derivatives are becoming increasingly important in world of markets as a tool for risk management. There was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta. on November 18,1996 to develop appropriate regulatory framework for derivatives trading in India. The primary purpose of a derivative contract is to transfer risk from one party to another i.e. risk in a financial sense in transferred from a party that wants to get rid of it to another party that is willing to take it on. Types of Derivatives 1) Futures & Forwards 2) Options 3) Swaps 4) Warrants
Forward :- A forward contract is a customized contract between tow entities, where settlement takes place on a specific date in future at today pre agreed price. Futures: - A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types of forward contracts means that the former are standardized exchange Traded contracts. Options: - Options are of two types,
1)Call option:- Call option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. 2)Put option:-Put option gives the buyer the right, but not obligation to sell a given quantity of the underlying asset at a given price on or before a given date.