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Frequently Asked Questions on Derivatives Trading At NSE
Post: #1

Frequently Asked Questions on Derivatives Trading At NSE


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1. What are derivatives?

Derivatives, such as futures or options, are financial contracts
which derive their value from a spot price, which is called the
“underlying”. For example, wheat farmers may wish to enter into
a contract to sell their harvest at a future date to eliminate the risk
of a change in prices by that date. Such a transaction would take
place through a forward or futures market. This market is the
“derivatives market”, and the prices of this market would be driven
by the spot market price of wheat which is the “underlying”. The
term “contracts” is often applied to denote the specific traded
instrument, whether it is a derivative contract in wheat, gold or equity
shares. The world over, derivatives are a key part of the fi nancial
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.

2. What is a forward contract?

In a forward contract, two parties agree to do a trade at some future
date, at a stated price and quantity. No money changes hands at the
time the deal is signed.

3. Why is forward contracting useful?

Forward contracting is very valuable in hedging and speculation.
The classic hedging application would be that of a wheat farmer
forward -selling his harvest at a known price in order to eliminate
price risk. Conversely, a bread factory may want to buy bread
forward in order to assist production planning without the risk of
price fl uctuations. If a speculator has information or analysis which
forecasts an upturn in a price, then he can go long on the forward
market instead of the cash market. The speculator would go long
on the forward, wait for the price to rise, and then take a reversing
transaction making a profi t.

4. What are the problems of forward markets?

Forward markets worldwide are affl icted by several problems:
(a) lack of centralisation of trading,
(b) illiquidity, and
© counterparty risk.
In the fi rst two of these, the basic problem is that of too much fl exibility
and generality. The forward market is like the real estate market in
that any two persons can form contracts against each other. This often
makes them design terms of the deal which are very convenient in that
specifi c situation for the specifi c parties, but makes the contracts nontradeable
if more participants are involved. Also the “phone market”
here is unlike the centralisation of price discovery that is obtained on
an exchange, resulting in an illiquid market place for forward markets.
Counterparty risk in forward markets is a simple idea: when one of
the two sides of the transaction chooses to declare bankruptcy, the
other suffers. Forward markets have one basic issue: the larger the
time period over which the forward contract is open, the larger are the
potential price movements, and hence the larger is the counter- party
risk.
Even when forward markets trade standardized contracts, and hence
avoid the problem of illiquidity, the counterparty risk remains a very
real problem.

5. What is a futures contract?

Futures markets were designed to solve all the three problems (listed
in Question 4) of forward markets. Futures markets are exactly like
forward markets in terms of basic economics. However, contracts are
standardised and trading is centralized (on a stock exchange). There is
no counterparty risk (thanks to the institution of a clearing corporation
which becomes counterparty to both sides of each transaction and
guarantees the trade). 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.
Post: #2
The National Stock Exchange India Limited (NSE) began trading derivatives with the launch of index futures on June 12, 2000. Futures contracts are based on the popular Nifty 50 Index. NSE also became the first stock exchange to launch stock option trading on individual securities as of July 2, 2001. Futures on individual securities were introduced on November 9, 2001, futures and options on individual securities are available in 175 Values ​​stipulated by SEBI.

The Stock Exchange has also introduced the trading of futures and options contracts based on Nifty IT, Nifty Bank, Nifty Midcap 50, Nifty Infrastructure, Nifty PSE, Nifty CPSE. This section gives you information about the NSE derivatives segment. Quotes and real-time information on derivatives, business processes and systems, clearing and settlement, risk management, statistics, etc.

Derivatives, such as futures or options, are financial contracts that derive their value from a spot price, which is called the "underlying". For example, wheat farmers may wish to sign a contract to sell their crop at a future date to eliminate the risk of a price change by that date. Such a transaction would take place through a forward or futures market. This market is the "derivatives market", and the prices of this market would be driven by the spot price of wheat that is the "underlying". The term "contracts" is often applied to designate the specific negotiated instrument, either a derivative contract in wheat, gold or shares. Throughout the world, derivatives are a key part of the financial system. The most important types of contracts are futures and options, and the most important underlying markets are capital, Treasury bonds, commodities, currencies, real estate, etc.
 

Marked Categories : derivatives, frequently asked questions in nse derivatives exam, nse derivatives questions and answers, frequently asked question on different trades in nse, abstract for trading in nse,

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