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WHAT IS DERIVATIVE?
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Answer Posted / nidhi shah
Derivatives are of 2 types: FUTURES and OPTIONS.
As the name suggests, DERIVATIVES means financial
instruments having "DERIVED VALUE".
FUTURES: You buy a COMPANY ABC Stock today at Rs 1050/-
(just for Eg). U enter into a contract with me, to sell the
stock for Rs 1070/- after 1 month. On the D day,
irrespective of whatever is the Market Price of the Stock u
will have to sell it to me at Rs 1070. Reason being, u have
entered into a Future Contract with me, and it is the
obligation of both parties to fulfill the contract.
OPTIONS: It is same as FUTURES, but u have the OPTION to
cancel the contract. that is to say, if the Market price of
the stock on the D day is more than 1070, u can withdraw
your sale contract from me. Options are NOT OBLIGATORY.
In both cases, u pay something called as a MARGIN MONEY, to
enter the contract.
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