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Derivatives Market Basic

Scope of Derivatives Market

Let’s understand the Derivatives with its History. Before 1999 – 2000, we were not having Exchange Traded Derivatives in India. Our average daily Market volume without Derivatives Market was around 2273 Crore in 1999 – 2000. After introduction of Derivatives it started rising and touched to around 200000 Crore Daily Volume.

As Derivatives doesn’t require the actual delivery or availability of product, People can make long and Short trade as per their view without having the Underlying. So it promotes the Volume as well as the Opportunity of Hedging to the people who have Forward Risk.

Derivatives – Speculation / Hedging

Derivatives trading is available on investment of Margins. That means you don’t need to pay full principal rather you need to pay just some percentage of total Exposure but the Profit and Loss arises in your account is on your full exposure. So as it is a leveraged Product it is having High Risk and High Returns profile. But I should share one more fact with you is that birth of Derivatives market has happened to fulfill the requirement of Hedging. So again it’s a great Hedging Tool. So it is completely depending upon the nature and knowledge of Investor what he wants to do. He can increase the risk as well as reduce the risk.

As we already wrote that almost 90% of Security Market volume is coming from Derivatives market, so it indirectly shows that lot of people are required in this segment. People who have good understanding of Derivatives are necessary for Research, Risk Management, Structured Product Development Desk and Dealing Desk.

Now we can see the volume comes in other Market like Commodity Market and Currency Market. The size of these Market is compare to Equity Market is very large and we are going to see the same in India very soon. So people can look for the opportunities in these Markets also.

Derivatives as Business Opportunity

As a businessman, you can make efficient forward Contract of your commodity if that is available in Commodity Market. You can hedge your foreign exposure as fluctuation in Currency impact the viability of Business at a very high level. You can understand the concept of Volatility as well as Pros and Cons of Leverage Products.