Derivatives

Derivatives are widely used in financial markets for hedging risk, speculation, and arbitrage. Their value depends on the price movement of an underlying asset like shares, gold, oil, or currency.

Common derivatives are traded on exchanges like the National Stock Exchange and Bombay Stock Exchange, under regulation of the Securities and Exchange Board of India.

Types of Derivatives

• Futures: Agreement to buy/sell at a future date at a fixed price
• Options: Right (not obligation) to buy/sell an asset
• Forwards: Customized contracts traded privately
• Swaps: Exchange of cash flows between parties

Key Features

• Value linked to an underlying asset
• Can be used for hedging or speculation
• Often involves leverage

Advantages

• Helps manage financial risk
• Provides opportunities for profit
• Increases market efficiency

Risks

• High volatility
• Leverage can amplify losses
• Requires strong market knowledge

"An investor buys a futures contract to purchase gold at a fixed price after 3 months, protecting against price increase."