Derivative products have been around for a long, long time. In fact, as early as the 1650s, dealings resembling present day derivative market transactions were seen in rice markets in Osaka, Japan.
The first leap towards an organized derivatives market came in 1848, when the Chicago Board of Trade (CBOT), the largest derivative exchange in the world, was established.
Today, equity and commodity derivative markets are rapidly gaining in size in India. In terms of popularity too, these markets are catching on like a forest fire. So, what are these markets all about? What are the products that they trade in? Why do people feel the need to trade in such products and what sort of traders benefit from such trades? Do these markets hold scope for retail investors too? And if so, how exactly can you go about trading in them?
Types of Derivatives
The most popular derivative products are Forwards, Futures, Options, Warrants and Swaps. These are discussed below:
Forwards
A forward contract or ‘forward’ is an agreement between two parties, wherein one will sell an asset to the other on a certain future date at an agreed price.
Futures
Futures contracts or ‘futures’ are an improvement over forward contracts as they are standardized and tradable.
Options
An option is a contract where the writer of the option grants the buyer of the option the right to purchase
Warrants
A warrant is a call option, which gives you the right (but you are not obliged) to buy a predetermined number of equity shares within a stipulated time frame at an agreed price.
Swaps
A swap is an agreement between two parties to exchange their cash flow streams, without liquidating the asset that generates those flows.