Derivative is a product whose value is derived from the value of one or more basic variables, called underlying asset in a contractual manner. The underlying asset can be equity, Forex commodity or any other asset. For example, Bullion traders may wish to sell their gold at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the “underlying”.
The current project aims to make the investors aware of the functioning of the derivatives. Derivatives act as a risk hedging tool for the investors. The project helps the investor in selecting the appropriate derivatives instrument in order to attain maximum return and to construct the portfolio. The primary objectives of the project are to study the derivatives market in India; to study the pay-off of futures and options; to present the trading procedure of futures and options; and to study the salient features of Committee reports.
The project finally explains the differences between the cash market and the derivatives market, the pros and cons of investing in derivatives market, and the different purposes for which investors are interested in derivative products. There are limitations as well for the project which include focus only on Indian derivatives market; short time period, insufficient data and the secondary data collected may not be authentic.