Derivatives are contracts whose values are based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.
A futures contract is an agreement made on the trading floor of a futures exchange between two parties to buy or sell an asset (commodity or financial instrument) at a certain time in the future at a certain price.
Clearing and Settlement
Derivatives traded on the NSE will be cleared by a Central Counterparty (CCP) through a process known as novation. Novation is the replacement of the initial contract between counterparties matched in the trading engine with a new contract between the CCP and the investors, making the CCP the buyer to the seller and the seller to the buyer.
CCP cleared derivatives are settled daily which means that gains and losses from a day's trading are deducted or credited to an investor's account each day, leading up to the expiry of the contract.
Derivatives contracts may be cash settled or physically settled. Physical settlement involves the delivery of the underlying. A cash settled contract is settled by receiving (or making) the net cash payment of the difference between the value at the position’s Exchange Delivery Settlement Price (EDSP) and the value based on the previous day’s closing price. This is due to the fact that all contracts are marked to market at the end of each trading day and the CCP either receives or pays that day’s variation margin.
Leverage provides a capital efficient way to gain exposure to underlying assets. This creates greater volatility which amplifies gains and losses
Allows investors to take advantage of price movements in the underlying asset
Liquid and easily traded
Allows for Portfolio diversification
Provides short selling opportunities to benefit from downward price movements
In the case of derivatives, you have no voting rights or any other ownership rights that would traditionally fall to a holder of the underlying equity
Who is this for?
This product is suited to both professional and private investors who want to hedge or gain exposure to assets and markets without holding these assets. Derivatives are traded by speculators hoping to make a profit on short-term movements and investors seeking to hedge or diversify their portfolios.