Basic Concepts in Derivatives Market

Updated: Sep 16, 2020

Derivatives Meaning :

#Derivatives is a security, whose value is derived from another financial entity referred to as an ‘Underlying Asset’. The underlying asset can be anything like a stock, bond, commodity or currency. Let's see some basic concepts related to Derivatives Market

#Hedging :

It is a trade initiative to cover the risk in particular asset. For example, a fund manager has 1 lakh shares of #Infosys and stock of Infosys is expected to fall by 10%. Then, to cover this risk a fund manager will buy 'PUT' option.

#Arbitrage :

It is a trade initiated to earn profit from inefficiencies in the market. For example, an Reliance Industries Ltd (RIL) stock trades at Rs. 1000 on #Nifty and same stock trades at Rs 995 on #Sensex, one can buy 100 shares from Sensex and sell on Nifty to earn a profit of Rs. 500.

[(1000-995)x100 = 500]

#Speculation :

It is a trade initiated to earn profit with higher risk. For example, based on market news which is negative for #Maruti Suzuki as an entity, one short (sell in intra-day) the stock and cover up the position same day by 3.30 pm (at day end). Will earn #money only if the stock falls.

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