Derivatives Trading in India

Currencies, stocks, bonds, commodities, and interest rates are commonly used as assets in derivative contracts. Derivatives are advanced secondary investment tools whose value is derived from the primary securities linked to them.

The value of these assets is volatile. Derivatives contracts are based on the concept of the opportunity of earning profits by speculating the value of linked assets at a point of time in future.

Options, futures, forwards, and swaps are the most popular contracts in the list of financial derivatives.

A derivative is a financial contract between two parties whose value is based on or derived from the value of an underlying asset or set of assets.

The types of derivatives are

  • Options
    Options are two-party contracts where a buyer gets the right to buy the underlying asset at a pre-defined price at a later date.

    He may, however, choose not to exercise this right. The contract ensures the seller sells the commodity if the option is exercised but does not bind the buyer to oblige.

    The seller is known as the option writer. He gets a premium from the buyer for the obligation to sell the assets if the option is exercised. The price agreed upon is called the strike price.

    Options can be exchange-traded or traded over the counter or between two parties.

  • Futures
    Futures are standard derivative contracts for buying or selling the underlying asset at a mutually agreed price at a specified date.

    The contract ensures the parties exercise their trade. Future contracts are traded on the exchange, and the specified price is marked to the market, meaning it is adjusted every day according to the fluctuations in the market. Also, the profits and losses are settled on the same day.

  • Forwards
    Forwards are the oldest and simplest form of derivative contracts. It is a standard contract between two parties to buy or sell something at a predefined price at a certain date in the future.

    The price and date are decided while signing the contract. Forwards can be customised to suit both the parties, but there is an inherent risk involved because there is no intermediary like an exchange in the forward contracts.

  • Swaps
    Swaps contracts are the most complex form of derivatives. The two parties in this contract exchange their cash flows and financial obligations.

    Interest rates and currencies are exchanged commonly through swaps contracts. However, swaps are not used by retail investors and not traded on the exchange in India.

Advantages of Derivative Trading

Derivatives are very popular as secondary financial instruments. Some of the advantages of trading in derivatives are:

  • Hedging – Being able to offset the risk of adverse price movements through hedging is what makes derivatives so lucrative for businesses.
  • Arbitrage - Buying a commodity at a lower price in one market and selling it at a higher price in another is arbitrage trading.
  • Protection from price fluctuations - Derivative contracts protect against any possible price fluctuations of the assets in future.
  • Lowering transaction costs - Derivatives are popular as risk management tools and reduce transaction costs drastically.

Derivative Trading with SRE

Stock derivatives are traded in India through NSE and BSE while commodity derivative trading in done through MCX and NCDEX. Derivative trading is a complex process that needs both capital and expertise. Some prerequisites for derivative trading are:

  • You need a demat and an active trading account which permits derivative trading.
  • You need to have surplus margin money to invest in trading. The margin is to be maintained and replenished if it falls below the prescribed limit until the trade is completely settled.
  • You should have complete knowledge of how derivatives are traded and strategies used in trading.
  • You should have a clear understanding of the risks associated with the trade and consider it carefully before getting into a derivative contract.

SRE provides you with a reliable platform to trade in commodities and currencies derivatives through leading exchanges of India.

SRE offers in-depth research by qualified analysts with rich industry experience. Your portfolio is proactively managed, and daily/weekly/monthly research reports are provided for better understanding of the market.

SRE has been a trusted name in the commodities and currencies derivative trading for the last 30 years. Our experts provide relevant and updated advice to help you make informed decisions.

A dedicated derivatives team from SRE ensures that you have a seamless and hassle-free experience while trading.

So, if you wish to open an account with Sykes & Ray Equities, get in touch with us today.