Depending upon your investment strategy, and duration you can place the right trade for you. You can use derivatives contracts to hedge your position in stocks, indices and other types of investments. In the sharp movement derivatives trading considering equity and currency investment can be a potential investment with higher investment. In short, you can use derivatives contracts in India for various purposes and calculate the risk factor you need to enter or exit the following trade.
In the stock market. There are different types of derivatives contracts. You can do derivatives trading using the types of derivatives contracts mentioned below:
Futures Contracts: These are standardised agreements to buy or sell an asset (commodity, currency, index, etc.) at a predetermined price on a specified future date. Futures contracts are commonly used by traders to speculate on price movements and also by businesses to hedge against price fluctuations.
Options Contracts: Options give the holder the right, but not the obligation, to buy (call option) or sell (put option) an asset at a predetermined price within a specified time in future. Options are used for various purposes such as hedging, speculation, and generating income.
Swaps: Swaps involve the exchange of cash flows between parties based on a predetermined formula. The most common types of swap contracts are interest rate swaps and currency swaps. Swaps are used to manage interest rate risk, and exchange rate risk, and to customise payment structures.
Forwards Contracts: Similar to futures contracts, forwards are agreements to buy or sell an asset at a future date, but they are not standardised and are usually traded over the counter. Forwards allow for more customization but also have greater counterparty risk.
Interest Rate Derivatives: These derivatives are based on interest rates. They include interest rate swaps, futures, and options. They are used to manage interest rate risk, particularly by financial institutions and corporations.
In derivatives trading, there is no transfer of underlying assets until the date, therefore income loss will not be taxed under the head of capital gains. Therefore, depending upon the fact whether the asset is a trader or an investor, the income from the business profession or income from other sources is determined and the income tax return will be taxed on a net basis.
Take a reverse position to protect your investments
Plough in only a small percentage of the entire cost to buy a contract
Option contracts limit your losses to the extent of premium
Can hedge in indices also with relatively low capital
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A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stock indices, etc. The underlying asset called the underlying, trades in cash or spot markets and its price is called the cash or spot price
For retail investors, the most easily accessible and tradable derivative instruments are Futures and Options. One can buy or sell an underlying asset at a pre-determined price. The Futures or Options are to be bought in lots (consisting of a specified quantity). It is called a contract and has a set expiry date (Last Thursday of the month) within which both the transaction legs (BUY and SELL) have to be closed.
They are instruments which can be SOLD first and bought back later within the contract expiry. It helps in hedging your cash positions in a negative situation.
Eg: If you hold RELIANCE Industries in your Demat Account; and the market is negative; an investor can hedge this by SELLING a Reliance Industries Futures contract or buying a PUT Option. Thus it helps investors to offset some notional losses that may occur due to negative markets.
Just activate the F&O segment in your account. Transfer money into the trading account. The money needed to buy this contract is called margin, i.e. money paid to the broker. It is only a percentage of the entire amount, dependent on the scrip category. Stable scrips have relatively lower margin whereas volatile stocks have a slightly higher margin to be paid.
State the main type of derivatives used for derivatives trading in India.
Some of the major types of derivatives are futures contracts, options contracts, swaps, and forwards contracts.
You can use derivatives contracts to hedge against price fluctuations. For example, a company can use futures contracts to lock in a future price for a commodity it needs, reducing the impact of price volatility
In short, the futures obligate traders to buy/sell an asset on a specified future date. Options provide the right (but not the obligation) to buy/sell an asset at a predetermined price within a specific time frame.
Leverage in trading allows traders to control a larger position with a smaller amount of capital. However, it amplifies both profits and losses. Therefore, its advice is to calculate risk before opting for leverage in trading.
Yes, derivatives carry risk due to their leveraged nature and potential for significant price volatility. Proper risk management is essential for better results.
Corporations, investors, traders, and financial institutions use derivatives for various purposes. Some of the reasons for doing derivatives trading are as follows: managing risk, speculating on price movements, and portfolio management.