Overview of Derivatives In Indian Context

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, Bullion traders may wish to sell their gold at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying".

The current project aims to make the investors aware of the functioning of the derivatives. Derivatives act as a risk hedging tool for the investors. The project helps the investor in selecting the appropriate derivatives instrument in order to attain maximum return and to construct the portfolio. The primary objectives of the project are to study the derivatives market in India; to study the pay-off of futures and options; to present the trading procedure of futures and options; and to study the salient features of Committee reports.

The project finally explains the differences between the cash market and the derivatives market, the pros and cons of investing in derivatives market, and the different purposes for which investors are interested in derivative products. There are limitations as well for the project which include focus only on Indian derivatives market; short time period, insufficient data and the secondary data collected may not be authentic.

The conclusions of the project include: speeding of Dematerialization is required for overcoming the settlement delays involved; administrative machinery of the existing stock exchange should be trained for successful derivatives trading; SEBI has to take further steps in the risk management mechanism; derivative market is newly started in India and it is known by every investor, so SEBI has to take steps to create awareness among the investors about the derivative segment; and SEBI has to take measure to use effectively the derivatives segment as a tool of hedging.

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