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, with futures and options being the two most common exchange-traded derivative types.

Exchange-traded derivatives in India include Index Futures (Nifty 50, Bank Nifty), Stock Futures, Index Options, and Stock Options. Commodity derivatives are traded on MCX and NCDEX, while currency derivatives (USD/INR, EUR/INR) are available on the NSE and BSE. Each contract has a fixed lot size, expiry date, and margin requirement.

Derivatives serve multiple purposes, including hedging against price risk in an existing portfolio, speculating on price movements, and managing portfolio exposure. Hedgers use derivatives to lock in prices and offset risk, while speculators take directional or volatility-based positions to seek returns from market movements.

SEBI mandates margin requirements including SPAN margin (minimum margin based on portfolio risk) and exposure margin (an additional buffer). Since October 2021, SEBI has implemented peak margin reporting, requiring brokers to collect margins upfront. Losses can exceed the initial margin deposited, so risk management is critical.

Derivative trading carries significant risk due to leverage, and losses can exceed the initial margin deposited. Beginners should start with options buying, where the maximum loss is limited to the premium paid, before exploring options selling or futures trading, which carry potentially unlimited risk and require deeper understanding of margins and Greeks.