Derivatives Market

3. Derivatives Market

• Definition: Derivatives are financial instruments that derive their value from an underlying security or financial instrument, such as equity, commodity, or currency.
• Details: They are primarily used for hedging to minimize price risk by investing in instruments that strategically offset the risk of adverse price movements.

Key Players and Instruments

• The main players in derivatives markets are hedgers, speculators, and arbitrageurs, each playing different roles in various situations.
• Futures and Options (F&O) are essential parts of the derivatives segment, with two main types:
  • Futures Contract: A standardized, exchange-traded contract to buy or sell an underlying product at a predetermined price on a future date.
  • Options Contract: Gives the buyer the right, but not the obligation, to exercise the option at a predetermined date and price. This includes:
    • Call Option: The right to buy the underlying security.
    • Put Option: The right to sell the underlying security.
  • Premium: Investors are charged a fee when buying an options contract.

Important Consideration

• Derivatives are considered high-risk products and are mainly used for hedging purposes, making them not recommended for retail investors.