Important Categories of Derivatives You Should Know About

Derivatives

Derivatives are financial instruments. These instruments derive their value from underlying assets. These are contracts between two parties involved in derivative trading. The underlying assets can be stocks, commodities, currency, etc. These assets have values, which keep fluctuating. Investors in derivative trading aim to earn profits from these fluctuations. You need a trading account if you want to trade in derivatives. Here we list the important categories of derivative trading.

1. Futures Contract

Futures contracts are just what the name suggests. These are contracts where an investor agrees to buy or sell an asset at a predefined price at a date in the future. The price of this asset is agreed upon the day of the contract. Let us understand this with an example. There are two parties involved. X and Y. X owns 5,000 shares of a company. X fears the price of the shares will fall. Hence, to avoid losses, X enters into a futures contract. Y, on the other hand, is a speculator who feels the values of the shares owned by X will increase. Both parties enter into a contract. If the price increase then X suffers losses and Y gains and vice versa.

2. Forwards Contract

A forwards contract is the opposite of the futures contract. In a forwards contract, the date is pre-decided but the assets are bought or sold based on the prices of the day of the transaction. These contracts are traded over the counter.

3. Options Contract

The Options Contract is similar to a futures contract. An options contract gives you the right to buy or sell an asset whose price is pre-determined. Here, there is no obligation to do the transaction. If the investor feels that he/she might incur losses they can opt out from the trade. A futures contract, on the other hand, requires the investor to do the transaction no matter the state of the asset. The investor only has to incur the premium costs.

4. Swaps

Swap is a complex type of derivative trading which only seasoned investors opt for. In this type of trading, you can change your cash flow from uncertain to certain. This type of Swap is done usually for currency trading and interest rates. This type of derivative trading in India does not have many takers, as the market is highly illiquid.

5. Warrants

When an option has a longer date than usual, it is known as a warrant. These longer date warrants are traded over the counter. A certificate is issued to the buyer, which entitles the buyer to buy the specific amount of the securities at a decided price. Here the price of the securities is more than the warrant’s exercise price.

6. Leaps & Baskets

LEAP is an acronym, which stands for Long Term Equity Anticipation Securities. These type of options have a maturity of up to 3 years. A basket, on the other hand, is a term, which is used for a group of several securities, which is created for the purpose of buying or selling.

There are share market apps available, which help you with online currency trading. Indiabulls Shubh is one such app. This is a trading platform which lets you trade in the share market. When it comes to currency trading and choosing a category, the above types can help you choose one.

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