Derivatives, such as futures or options, are financial contracts which derive their value from a spot price, which is called the “underlying”. The term “contracts” is often applied to denote the specific traded instrument, whether it is a derivative contract in commodities, gold or equity shares. The world over, derivatives are a key part of the financial system. The most important contract types are futures and options, and the most important underlying markets are equity, treasury bills, commodities, foreign exchange, real estate etc.

Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardized and trading is centralized (on a stock exchange). There is no counterparty In futures markets, unlike in forward markets, increasing the time to expiration does not increase the counter party risk. Futures markets are highly liquid as compared to the forward markets.

There are two types of derivatives instruments traded on Exchanges; namely Futures and Options: Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives

the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options:

“Calls” give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

“Puts” give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. All the options contracts are settled in cash.

Further the Options are classified based on type of exercise. At present the Exercise style can be European or American.

American Option - American options are options contracts that can be exercised at any time upto the expiration date. Options on individual securities available at NSE are American type of options.

European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.

Futures and options contracts are traded on Indices and on Single stocks.

FUTURES TRADING WILL BE OF INTEREST TO THOSE WHO WISH TO:

OPTIONS TRADING WILL BE OF INTEREST TO THOSE WHO WISH TO:

BENEFITS OF TRADING IN FUTURES AND OPTIONS:

An investor can trade the ‘entire stock market’ by buying index futures instead of buying individual securities with the efficiency of a mutual fund. The advantages of trading in Index Futures are:

It is the last day on which the contracts expire. Futures and Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

In- the- money options (ITM) - An in-the-money option is an option that would lead to positive cash flow to the holder if it were exercised immediately. A Call option is said to be in-the-money when the current price stands at a level higher than the strike price. If the Spot price is much higher than the strike price, a Call is said to be deep in-the-money option. In the case of a Put, the put is in-the-money if the Spot price is below the strike price.

At-the-money-option (ATM) - An at-the money option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is said to be “at-the-money” when the current price equals the strike price.

Out-of-the-money-option (OTM) - An out-of- the-money Option is an option that would lead to negative cash flow if it were exercised immediately. A Call option is out-of-the-money when the current price stands at a level which is less than the strike price. If the current price is much lower than the strike price the call is said to be deep out-of-the money. In case of a Put, the Put is said to be out-of-money if current price is above the strike price.

Yes. Margins are computed and collected on-line, real time on a portfolio basis at the client level. Brokers are required to collect the margin upfront from the client & report the same to the Exchange.

Investors must understand that investment in derivatives has an element of risk and is generally not an appropriate avenue for someone of limited resources/ limited investment and / or trading experience and low risk tolerance. An investor should therefore carefully consider whether such trading is suitable for him or her in the light of his or her financial condition. An investor must accept that there can be no guarantee of profits or no exception from losses while executing orders for purchase and / or sale of derivative contracts.

Importance of Derivatives: Derivatives are very important financial instruments for risk management as they allow risks to be separated and more precisely controlled. Derivatives are used to shift elements of risk and therefore can act as a form of:

OPENING PURCHASE TRANSACTION

An opening purchase transaction is one that creates or increases a long position in a given option series.

OPENING SALE TRANSACTION

An opening sale transaction is one that creates or increases a short position in a given option series. Such a sale is also referred to as "writing" an option contract.

CLOSING PURCHASE TRANSACTION

A closing purchase transaction is one that eliminates or reduces a short position in a given option series. Such a purchase is commonly referred to as "covering" a short option position.

CLOSING SALE TRANSACTION

A closing sale transaction is one that eliminates or decreases a long position in a given option series.

Open interest refers to the number of outstanding contracts in the exchange market.

Yes. It is mandatory to provide valid financial proof to open any derivative segment.

Following are the applicable documents apart from bank statement as a valid financial proof, please provide any one of the following -* Copy of ITR Acknowledgement (for last financial year)* Copy of Annual Accounts (for last financial year)* Copy of Form 16 in case of salary income (for last financial year)* Net worth certificate (latest one, or at the end of last financial year)* Salary Slip (for one month in current financial year)* Copy of Demat account Holding statement (not more than 3 months old).