Derivatives (LearnHub)
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Community User Posted on 02:56pm 14-Nov-2019

What is a Derivative?

Derivative is a financial instrument which does not have any value on its own. For e.g. Apple juice can be called as derivative because it does not have any value or worth on its own, rather its value is taken from the value of apples. Similarly in capital markets, a financial derivative extracts its worth or value from any underlying asset on which it is based upon. The underlying asset can be stocks, bonds, commodities, currencies, interest rates, etc. Each derivative contract would have specific contract/lot size, expiry date and price at which the contract would be settled.
 
The first official derivatives came in the year 1848 in CHICAGO. It was a customized contract named forwards where the underlying asset was wheat as a commodity. The key reason for the evolution of such instrument was to reduce the risk of price volatility between producers and consumers of wheat.
 
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Community User Posted on 02:57pm 14-Nov-2019

What are the different instruments available in India under the derivative segment?

There are two kinds of derivatives which are currently available for trading on NSE and BSE - Futures and Options. Futures Contract is a standardized contract between two participants to buy or sell an underlying asset at a particular future date and a specific price.

On the other hand, an option is a contract which gives the right to the buyer, but does not impose obligation, to either buy or sell an underlying asset at a particular future date and a specific price.

You can trade in Future and Options under the F&O tab on ICICIdirect.com by logging into your account.

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What is a Derivative?

What is a Futures contract and how is it different from a Forward contract?

ICICIdirect LearnHub

Community User Posted on 02:59pm 14-Nov-2019

What is a Futures contract and how is it different from a Forward contract?

Derivatives can be generally of 2 types - Over the Counter (OTC) and Exchange Traded. OTC derivatives are less refined in nature as contract terms are mostly customized in comparison to Exchange traded which captures all standardized terms and conditions. Futures Contract is an example of exchange traded derivative instruments and Forward contract is an example of OTC derivative.
 
In futures contract, the buyer and seller agree to buy and sell specific amount of underlying asset at a future date at a particular price. So, all the contract specifications are standardized as per the exchange on which it is tradable. Therefore, the exchange guarantees the trade settlement in case of future contract.  On the other hand, forward contract is a customized contract (OTC) where buyer and seller themselves decide the contract specifications with no central counterparty between the two.
 

Point of Distinction

Forward Contract

Futures Contract

Contract Terms

Customized

Standardized

Risk of Default

High

Low

Regulation

Self-Regulated

Stock Exchange

Initial Margin

Not Required

Required

Settlement

On Expiry Date

Daily basis

 
Therefore we can say a futures contract is like a standardized forward contract.
 
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Community User Posted on 03:00pm 14-Nov-2019

What is the meaning of lot size in derivatives contract?

Each derivative contract, whether OTC or Exchange Traded, would have contract specifications. One such specification would be in the context of the quantity to be bought or sold as per contract. This quantity is called contract size or lot size. The lot size would be different for different derivative securities. For e.g. an equity derivative on stock A might have 300 shares as lot size whereas an equity derivative on stock B might have 100 shares as lot size.
You can check the lot size of derivatives contract on ICICIdirect.com under the F&O tab by logging into your account.

Related Questions >>

What is a Futures contract and how is it different from a Forward contract?

What is the meaning of expiry date in derivatives contract?

ICICIdirect LearnHub

Community User Posted on 03:02pm 14-Nov-2019

What is the meaning of expiry date in derivatives contract?

The expiry date is the day when the buyer and seller of a derivative contract have to honor their obligations/rights as per the contract specifications. Therefore, each derivative contract has a finite life after which the contract expires. For e.g. at the end of September 2019, 1 month Futures on Stock A would have an expiry date in October 2019, which would be the last Thursday of October 2019. This futures contract would cease to exist after 31 October 2019.

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What is the meaning of lot size in derivatives contract?

How many future contracts are available in the market at any point of time and how are their prices decided?