The document provides an overview of derivatives concepts, including the different types of derivatives contracts such as forwards, futures, swaps, and options. It discusses key terms like underlying assets, features of derivatives, and important concepts in options. The history of derivatives trading in India is covered, along with the regulatory framework and guidelines put forth by committees like the L.C. Gupta Committee and J.R. Verma Committee.

1. Derivatives Basic Concept Arihant Bhansali Neha Singhi & Company Mob+919831407321 Email: arihant@nehasinghi.com

2. Introduction Secondary market contributes significantly to the Indian financial market

3. Expansion- Variety of financial instruments vis-a-vis Scale of operations

4. Derivatives-a financial product becoming increasingly popular

5. Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, NSE and BSE

6. Derivative is…. A derivative is a financial instrument, whose value depends on the value of basic underlying variable

7. The value of derivative is linked to risk or volatility in either financial asset, transaction, market rate, or contingency, and creates a product

8. Underlying Assets T-Bill Interest Rates Index & Bonds Foreign Exchange Rate Crude Oil Precious Metals Agri Commodities Stocks

9. Features of Derivatives Traded on exchange

10. No compulsory physical trading of underlying assets

11. All transactions in derivatives take place in future specific date

12. Hedging Device-Reduces risk

13. Derivatives has low transaction cost

14. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative.

15. Types of Derivatives Contract Derivatives Contract Forwards Futures Swaps Options

16. Forwards A forward contract is a customized contract between two entities, where settlement takes place as a specific date in the future at predetermined price. Ex: On 10th Novem, Ram enters into an agreement to buy 100 kgs of wheat on 1st May at Rs.10000 from Shyam, a farmer. It is a case of a forward contract where Ram has to pay Rs.10000 on 1st May to Shyam and Shyam has to supply 100 kgs of wheat. Ram has taken a long position assuming the price of the wheat will rise in the future six months . Normally traded outside exchange

17. Futures A financial contract obligating the buyer to purchase an asset, (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.

18. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange.

19. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

20. Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.

21. Swaps Swaps are private agreement between two parties to exchange cash flows in the future according to a pre-arranged formula.

22. They can be regarded as portfolio of forward contracts.

23. The two commonly used Swaps are- i) Interest Rate Swaps: - A interest rate swap entails swapping only the interest related cash flows between the parties in the same currency. ii) Currency Swaps: - A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and after a specified period of time, to give back the original amount swapped.