What is the purpose of derivatives market in India?
Derivative market in India provide a range of instruments to help investors hedge risk and speculate on price movements. Forward contracts and futures contracts are two types of derivatives that involve the same underlying asset but have distinct differences in structure and characteristics.
Derivative market serves as an important source of information about prices. Prices of derivative instruments such as futures and forwards can be used to determine what the market expects future spot prices to be. In most cases, the information is accurate and reliable.
The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying. This allows for more effective risk management within companies and the broader economy. In addition, the derivatives market plays a role in information discovery and market efficiency.
Financial derivatives are commonly used for managing various financial risk exposures, including price, foreign exchange, interest rate, and credit risks.
The derivatives play vital functions like risk reduction through hedging, ensuring market efficiency, deal price discovery of the underlying asset, etc. The risk reduction is possible by ways of risk transfer, risk diversification, risk allocation, and risk neutralizing.
The most common derivatives trading instruments in India are futures and options. While futures provide you with the right and obligation to buy or sell the underlying asset at a future date, options give you the right, not the obligation, to buy or sell the underlying asset at a future date.
The National Stock Exchange of India (NSE) has again emerged as the world's largest derivatives exchange in 2023, in terms of the number of contracts traded, according to the Futures Industry Association (FIA). This is the fifth straight year when the exchange earned the top position.
Derivatives markets in India have been in existence in one form or the other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading way back in 1875. In 1952, the Government of India banned cash settlement and options trading.
Derivative contracts are short-term financial instruments that come with a fixed expiry date. The underlying asset can be stocks, commodities, currencies, indices, exchange rates, or even interest rates. Derivative trading involves both buying and selling of these financial contracts in the market.
Investors use derivatives to hedge a position, increase leverage, or speculate on an asset's movement. Derivatives can be bought or sold over the counter or on an exchange. There are many types of derivative contracts including options, swaps, and futures or forward contracts.
What are the disadvantages of derivatives?
One of the main disadvantages of derivatives is that they can be very risky investments. They are highly leveraged, which means that a small move in the price of the underlying asset can lead to a large gain or loss. This makes them very volatile and unpredictable.
Derivatives make arbitrage between two different assets much easier. In terms of the impact on the real economy, the more preferable risk distribution through hedging combined with the lower cost of capital allows agents to better concentrate on their specific strengths, resulting in larger sustainable growth rates.
The four major types of derivative contracts are options, forwards, futures and swaps. Options: Options are derivative contracts that give the buyer a right to buy/sell the underlying asset at the specified price during a certain period of time.
What Is a Derivative? The term derivative refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. A derivative is set between two or more parties that can trade on an exchange or over-the-counter (OTC).
Today, equity derivatives account for a staggering 99.6% of Indian stock market volumes, totaling over $4.3 trillion per day that roughly translates into 125% of the underlying companies' market capitalisation or over 200% of the free float being traded every day.
A derivative is a financial instrument that derives its value from something else. Because the value of derivatives comes from other assets, professional traders tend to buy and sell them to offset risk.
Securities and Exchange Board of India (SEBI) regulates the commodity derivatives market in India since September 28, 2015.
Banks play double roles in derivatives markets. Banks are intermediaries in the OTC (over the counter) market, matching sellers and buyers, and earning commission fees. However, banks also participate directly in derivatives markets as buyers or sellers; they are end-users of derivatives.
Derivatives allow market participants to allocate, manage, or trade exposure without exchanging an underlying in the cash market. Derivatives also offer greater operational and market efficiency than cash markets and allow users to create exposures unavailable in cash markets.
Cash Markets are the markets where assets get traded and transactions take place on an immediate basis. Derivative Markets are the markets where derivatives instruments like futures and options are traded. When you trade in cash markets, you become the owner as and when you receive the delivery.
How is the biggest trader in India?
| Position | Top Traders in India |
|---|---|
| 1 | Premji and Associates |
| 2 | Radhakrishnan Damani |
| 3 | Rakesh Jhunjhunwala |
| 4 | Raamdeo Agrawal |
The 'Nifty Futures' is the most widely traded futures instrument, thus making it the most liquid contract in the Indian derivative markets.
The National Stock Exchange of India Limited (NSE) started trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark index --- Nifty 50. The NSE introduced trading in Index Options (also based on Nifty 50) on June 4, 2001.
Derivatives Trader Salaries in India
The average salary for Derivatives Trader is ₹6,00,000 per year in the India. The average additional cash compensation for a Derivatives Trader in the India is ₹1,00,000, with a range from ₹50,000 - ₹3,00,000.
Income from trading in derivatives is treated as business income by the tax authorities. Even if the investor is a salaried taxpayer, a partner in a company or a pensioner, the gains (or losses) from futures and options will be treated as business income.
