Before giving you detail on different types of derivatives, let me tell you a brief introduction about the derivatives market. It is a completely different platform from share market investment.
A derivative is just a contract and the value of this contract is derived by an underlying asset.
And that underlying asset could be anything it could be the stocks or any commodity, oil, etc.
Here you need to understand that a particular derivative contract depends on the underlying assets completely.
Now the derivative contract has different types of varieties in their model which we are going to share further in this article.
Forward contract:
most of the theory you can understand literally by this contract’s name. It is most commonly used in the high budget market where you fix the rate for a long time. Let’s take a scenario, suppose you are the owner of a sugar plantation factory where you need sugar cane for your sugar production. In this case, you make a deal with a farmer that you will buy 20 rupees per quintal for 10 years. Now the price will be the same unless the contract will finish.
It is an OTC contract (over the counter). Here you can not get a mediator in this contract as you saw in the example that deal was between the business person and a farmer.
Future contract:
It is the same as a forward contract. A futures contract is an exchange-traded contract while a forward contract is an over the counter contract. It means in a futures contract there is a mediator who could be stock exchange or a derivative exchange. And this is the basic difference between forward and a future contract.
In this case, the chance of defaults or losses is low because if the prices fluctuate then the mediator will be responsible for it. You can normally say that the OTC contracts are uncontrolled and unregulated. But the exchange-traded contracts are more transparent and regulated.
And the main reason behind its safety is future contracts are governed by the SEBI security and exchange board of India.
Option:
this is completely different from the future and forward contract. Here you have the chance to cure your loss before the price down in the market. According to this contract, you can ensure your contract so that the possibility of the risk will be low. It is the same as a car or bike, health or any other insurance. And here you have to pay a premium for your future leverage in your insurance. We know that you are well aware of the premium payment for any kind of insurance. In this case, if you face any kind of loss in your contract because of the market down the insurance company will responsible for paying you all your loss by applying all terms and conditions.
Swaps contract:
basically this is an asset exchange with a fix interest rate. Most of the cases it deals in the form of currency. This is the best rule to maintain cash flow and overcome the risk of foreign exchange. Most multinational national companies are using these types of derivative contracts. Although this is one of the most complex derivatives in the market.
Conclusion:
We expect that now you have got some precise points of view towards all types of derivatives market. derivative investments are not generally for small retailers or those have only 10 -20 lakhs budgets in their pockets. But still, this is the most important to know about the functions of the derivative market. And you are eager to learn derivative investments you can join our derivative trading courses in Delhi to be an expert derivatives analyst.
