What are Derivatives?
Derivatives are financial contracts whose value is derived from the price of an underlying asset such as stocks, stock indices, commodities, currencies, or interest rates. In India, derivatives are traded on the NSE and BSE under SEBI regulation. The two most common types of exchange-traded derivatives are futures and options. Derivatives serve multiple purposes including hedging against price risk, speculating on price movements, and portfolio management.
Types of Derivatives in India
Exchange-traded derivatives in India include Index Futures (Nifty 50, Bank Nifty), Stock Futures (individual company futures), Index Options (Nifty, Bank Nifty options), and Stock Options. Commodity derivatives are traded on MCX and NCDEX. Currency derivatives (USD/INR, EUR/INR) are available on NSE and BSE. Each derivative contract has a fixed lot size, expiry date, and margin requirement. Weekly options expiry for indices has become increasingly popular among traders.
Risks and Margin Requirements
Derivative trading carries significant risk due to leverage. SEBI mandates margin requirements including SPAN margin (minimum margin based on portfolio risk) and exposure margin (additional buffer). Since October 2021, SEBI has implemented peak margin reporting, requiring brokers to collect margins upfront. Derivative losses can exceed the initial margin deposited, making risk management critical. Beginners should start with options buying (limited risk) before exploring options selling or futures trading.