3. DEFINITION OF DERIVATIVES
Derivatives are defined as financial instruments whose value derived from the prices of oneor more other assets such as equity securities, fixed-income securities, foreign currencies, or commodities. Derivatives are also a kind of contract between two counterparties to exchange payments linked to the prices of underlying assets.One such definition is, “Derivatives involve payment / receipt of incomegenerated by the underlying asset on a notional principal”Derivative can also be defined as
“a financial instrument that does not constitute ownership,but a promise to convey ownership”.
The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contractsin commodities all over India. As per this the Forward Markets Commission (FMC)continues to have jurisdiction over commodity futures contracts. Derivatives aresecurities under the Securities Contracts (Regulation) Act, 1956 (SCRA), and hence thetrading of derivatives is governed by the regulatory framework under the SCRA.The Securities Contracts (Regulation) Act, 1956 defines “derivative” to include-“
A security derived from a debt instrument, share, loan whether secured or unsecured,risk instrument or contract differences or any other form of security”.“A contract which derives its value from the prices, or index of prices, of underlying securities”.
According to JOHN C. HUL
“A derivatives can be defined as a financial instrument whose value depends on (or derives from) the values of other, more basic underlying variables.”
According to ROBERT L. MCDONALD
“A derivative is simply a financial instrument (or even more simply an agreement between two people) which has a value determined by the price of something else.
All these definitions point out the fact that transactions are carried out ona notional principal, transferring only the income generated by the underlying assets.