Derivatives

The term derivative refers to a type of financial contract whose value is dependent on an
underlying asset, group of assets, or benchmark. A derivative is set between two or more parties
that can trade on an exchange or over-the-counter (OTC). These contracts can be used to trade
any number of assets and carry their own risks. Prices for derivatives derive from fluctuations in
the underlying asset. These financial securities are commonly used to access certain markets and
may be traded to hedge against risk.

Types of Derivatives

Derivatives are now based on a wide variety of transactions and have many more uses. There are
even derivatives based on weather data, such as the amount of rain or the number of sunny days
in a region.

There are many different types of derivatives that can be used for risk management, speculation,
and leveraging a position. The derivatives market is one that continues to grow, offering products
to fit nearly any need or risk tolerance. The most common types of derivatives are futures,
forwards, swaps, and options.

Futures

A futures contract, or simply futures, is an agreement between two parties for the purchase and
delivery of an asset at an agreed-upon price at a future date. Futures are standardized contracts
that trade on an exchange. Traders use a futures contract to hedge their risk or speculate on the
price of an underlying asset. The parties involved are obligated to fulfil a commitment to buy or
sell the underlying asset.

Cash Settlements of Futures

Not all futures contracts are settled at expiration by delivering the underlying asset. If both
parties in a futures contract are speculating investors or traders, it is unlikely that either of them
would want to make arrangements for the delivery of several barrels of crude oil. Speculators can
end their obligation to purchase or deliver the underlying commodity by closing (unwinding)
their contract before expiration with an offsetting contract.
Forwards

Forward contracts or forwards are similar to futures, but they do not trade on an exchange. These
contracts only trade over-the-counter. When a forward contract is created, the buyer and seller
may customize the terms, size, and settlement process. As OTC products, forward contracts carry
a greater degree of counterparty risk for both parties.

Swaps
Swaps are another common type of derivative, often used to exchange one kind of cash flow
with another. For example, a trader might use an interest rate swap to switch from a variable
interest rate loan to a fixed interest rate loan, or vice versa.

Options

An options contract is similar to a futures contract in that it is an agreement between two parties
to buy or sell an asset at a predetermined future date for a specific price. The key difference
between options and futures is that with an option, the buyer is not obliged to exercise their
agreement to buy or sell. It is an opportunity only, not an obligation, as futures are. As with
futures, options may be used to hedge or speculate on the price of the underlying asset.

Instrument Symbol Expiry Date Option Strike %Chng Underlying

Type Type Price Value

Index Options NIFTY 28-Apr-2022 Put 17200 103.84 17171.95

Index Options NIFTY 28-Apr-2022 Call 17300 -61.93 17171.95

Index Options BANKNIFTY 28-Apr-2022 Put 36000 250.15 36044.75

Index Options BANKNIFTY 28-Apr-2022 Call 36500 -65.79 36044.75

Index Options NIFTY 28-Apr-2022 Call 17500 -72.1 17171.95

Index Options NIFTY 28-Apr-2022 Call 17400 -67.35 17171.95

Index Options NIFTY 28-Apr-2022 Call 17200 -54.97 17171.95

Index Options NIFTY 28-Apr-2022 Put 17000 102.4 17171.95

Index Options BANKNIFTY 28-Apr-2022 Put 36500 186.59 36044.75

Disfference between Forward Contract & Futures Contract

Basis for Forward Contract Futures Contract

Comparison

Forward Contract is an agreement A contract in which the parties agree to

Meaning
between parties to buy and sell the exchange the asset for cash at a fixed price
underlying asset at a specified date and at a future specified date is known as
and agreed rate in future. a future contract.

What is it? It is a tailor-made contract. It is a standardized contract.

Traded on Over the counter, i.e. there is no Organized stock exchange.

secondary market.

Settlement On maturity date. On a daily basis.

Risk High Low

Default As they are private agreement, the No such probability.

chances of default are relatively
high.

Size of the contract Depends on the contract terms. Fixed

Collateral Not required Initial margin required.

Maturity As per the terms of contract. Predetermined date

Regulation Self-regulated By stock exchange

Liquidity Low High

Companies Available In F & O Trading In India

Derivatives On Individual Securities

Underlying Symbol Underlying Symbol

Aarti Industries Limited Aartiind L&T Technology Services Limited Ltts

Abb India Limited Abb Lupin Limited Lupin

Abbott India Limited Abbotindia Mahindra & Mahindra Limited M&M

Aditya Birla Capital Limited Abcapital Mahindra & Mahindra Financial M&Mfin
Services Limited

Aditya Birla Fashion And Retail Abfrl Manappuram Finance Limited Manappura
Limited m

Acc Limited Acc Marico Limited Marico

Adani Enterprises Limited Adanient Maruti Suzuki India Limited Maruti

Adani Ports And Special Economic Adaniports United Spirits Limited Mcdowell-
Zone Limited N

Alkem Laboratories Limited Alkem Multi Commodity Exchange Of Mcx

India Limited

Amara Raja Batteries Limited Amarajabat Metropolis Healthcare Limited Metropolis

Ambuja Cements Limited Ambujacem Max Financial Services Limited Mfsl

Alembic Pharmaceuticals Limited Aplltd Mahanagar Gas Limited Mgl

Apollo Hospitals Enterprise Apollohosp Mindtree Limited Mindtree

Limited

Apollo Tyres Limited Apollotyre Motherson Sumi Systems Limited Mothersumi

Ashok Leyland Limited Ashokley Mphasis Limited Mphasis

Asian Paints Limited Asianpaint Mrf Limited Mrf

 Astral Limited Astral Muthoot Finance Limited Muthootfin

Atul Limited Atul Nippon Life India Asset Nam-India

Management Limited

Au Small Finance Bank Limited Aubank National Aluminium Company Nationalum

Limited

Aurobindo Pharma Limited Auropharma Info Edge (India) Limited Naukri

Axis Bank Limited Axisbank Navin Fluorine International Navinfluor

Limited

Bajaj Auto Limited Bajaj-Auto Nbcc (India) Limited Nbcc

Bajaj Finserv Limited Bajajfinsv Nestle India Limited Nestleind

Bajaj Finance Limited Bajfinance Nmdc Limited Nmdc

Balkrishna Industries Limited Balkrisind Ntpc Limited Ntpc

Balrampur Chini Mills Limited Balramchin Oberoi Realty Limited Oberoirlty

Bandhan Bank Limited Bandhanbnk Oracle Financial Services Software Ofss

Limited

Bank Of Baroda Bankbaroda Oil & Natural Gas Corporation Ongc

Limited

Bata India Limited Bataindia Page Industries Limited Pageind

Bharat Electronics Limited Bel Piramal Enterprises Limited Pel

Berger Paints (I) Limited Bergepaint Persistent Systems Limited Persistent

Bharat Forge Limited Bharatforg Petronet Lng Limited Petronet

Bharti Airtel Limited Bhartiartl Power Finance Corporation Limited Pfc

Bharat Heavy Electricals Limited Bhel Pfizer Limited Pfizer

 Biocon Limited Biocon Pidilite Industries Limited Pidilitind

Bosch Limited Boschltd Pi Industries Limited Piind

Bharat Petroleum Corporation Bpcl Punjab National Bank Pnb

Limited

Britannia Industries Limited Britannia Polycab India Limited Polycab

Birlasoft Limited Bsoft Power Grid Corporation Of India Powergrid

Limited

Canara Bank Canbk Pvr Limited Pvr

Can Fin Homes Limited Canfinhome Rain Industries Limited Rain

Chambal Fertilizers & Chemicals Chamblfert The Ramco Cements Limited Ramcocem
Limited

Cholamandalam Investment And Cholafin Rbl Bank Limited Rblbank

Finance Company Limited

Cipla Limited Cipla Rec Limited Recltd

Coal India Limited Coalindia Reliance Industries Limited Reliance

Coforge Limited Coforge Steel Authority Of India Limited Sail

Colgate Palmolive (India) Limited Colpal Sbi Cards And Payment Services Sbicard
Limited

Container Corporation Of India Concor Sbi Life Insurance Company Sbilife

Limited Limited

Coromandel International Limited Coromandel State Bank Of India Sbin

Crompton Greaves Consumer Crompton Shree Cement Limited Shreecem

Electricals Limited

City Union Bank Limited Cub Siemens Limited Siemens

 Cummins India Limited Cumminsind Srf Limited Srf

Dabur India Limited Dabur Shriram Transport Finance Srtransfin

Company Limited

Dalmia Bharat Limited Dalbharat Strides Pharma Science Limited Star

Deepak Nitrite Limited Deepakntr Sun Pharmaceutical Industries Sunpharma

Limited

Delta Corp Limited Deltacorp Sun Tv Network Limited Suntv

Divi's Laboratories Limited Divislab Syngene International Limited Syngene

Dixon Technologies (India) Dixon Tata Chemicals Limited Tatachem

Limited

Dlf Limited Dlf Tata Communications Limited Tatacomm

Dr. Reddy's Laboratories Limited Drreddy The Indian Hotels Company Indhotel
Limited

Eicher Motors Limited Eichermot The India Cements Limited Indiacem

Escorts Limited Escorts Indiamart Intermesh Limited Indiamart

Exide Industries Limited Exideind Interglobe Aviation Limited Indigo

The Federal BankㆠLimited Federalbnk Indusind Bank Limited Indusindbk

Firstsource Solutions Limited Fsl Indus Towers Limited Industower

Gail (India) Limited Gail Infosys Limited Infy

Glenmark Pharmaceuticals Limited Glenmark Intellect Design Arena Limited Intellect

Gmr Infrastructure Limited Gmrinfra Indian Oil Corporation Limited Ioc

Gujarat Narmada Valley Fertilizers Gnfc Ipca Laboratories Limited Ipcalab

And Chemicals Limited
 Godrej Consumer Products Godrejcp Indian Railway Catering And Irctc
Limited Tourism Corporation Limited

Godrej Properties Limited Godrejprop Itc Limited Itc

Granules India Limited Granules Jindal Steel & Power Limited Jindalstel

Grasim Industries Limited Grasim Jk Cement Limited Jkcement

Gujarat State Petronet Limited Gspl Jsw Steel Limited Jswsteel

Gujarat Gas Limited Gujgasltd Jubilant Foodworks Limited Jublfood

Hindustan Aeronautics Limited Hal Kotak Mahindra Bank Limited Kotakbank

Havells India Limited Havells L&T Finance Holdings Limited L&Tfh

Hcl Technologies Limited Hcltech Dr. Lal Path Labs Ltd. Lalpathlab

Housing Development Finance Hdfc Laurus Labs Limited Lauruslabs

Corporation Limited

Hdfc Asset Management Company Hdfcamc Lic Housing Finance Limited Lichsgfin
Limited

Hdfc Bank Limited Hdfcbank Larsen & Toubro Limited Lt

Hdfc Life Insurance Company Hdfclife Larsen & Toubro Infotech Limited Lti
Limited

Hero Motocorp Limited Heromotoco Torrent Pharmaceuticals Limited Torntpharm

Hindalco Industries Limited Hindalco Torrent Power Limited Torntpower

Hindustan Copper Limited Hindcopper Trent Limited Trent

Hindustan Petroleum Corporation Hindpetro Tvs Motor Company Limited Tvsmotor

Limited

Hindustan Unilever Limited Hindunilvr United Breweries Limited Ubl

 Honeywell Automation India Honaut Ultratech Cement Limited Ultracemco
Limited

Indiabulls Housing Finance Ibulhsgfin Upl Limited Upl

Limited

Icici Bank Limited Icicibank Vedanta Limited Vedl

Icici Lombard General Insurance Icicigi Voltas Limited Voltas

Company Limited

Icici Prudential Life Insurance Icicipruli Whirlpool Of India Limited Whirlpool

Company Limited

Vodafone Idea Limited Idea Wipro Limited Wipro

Idfc Limited Idfc Zee Entertainment Enterprises Zeel

Limited

Idfc First Bank Limited Idfcfirstb Zydus Lifesciences Limited Zyduslife

Indian Energy Exchange Limited Iex Indraprastha Gas Limited Igl

Difference Between American, European And Bermudan Options

What are American Options?

American options are arguably the best known and most widely used. They include, of course,
call and put options. Stock options in US stock markets typically have an expiration period of
between three months and one year.

Let’s look at an example. An investor who purchased an American call option in January knows
that his option will expire in April. The exact date of expiration is known and is listed in the
option contract. His option specifies that he can purchase stock in Company ABC for $30 per
share. $30 is the option’s strike price, the price at which the option can be exercised. The value
of the option will change, moving in sync with the underlying asset.
The trader sees that the price of the stock is continuing to rise. The stock price climbs to $60 by
the end of March. He exercises his option and purchases 100 shares of the stock at the $30 strike
price for $3,000. He then turns around and sells his shares at the current market price, receiving
$6,000 from the sale (100 shares x $60 per share). He’s made a profit of $3,000 because he was
able to sell his shares for double the amount that he purchased them for.

American options are widely used because they offer the most flexible exercise schedule: they
can be exercised on any trading day prior to their expiration.

What are European Options?

European options are different because they can’t be exercised before the expiration date. In
other words, they can only be exercised on one specific date, which means that traders enjoy
much less flexibility in how they handle option trading.

For example, an investor buys a European call option to buy 100 shares of Company ABC, with
a strike price of $30 and an expiration date in April. He sees the shares climb to $60 by mid-
February. However, unlike the holder of an American-style option, he does not have the freedom
to exercise his option at that time – he can only exercise it upon expiration.

Unfortunately, by the time the option’s expiration, or maturity, date rolls around, ABC stock has
fallen to $35 a share. He can still exercise his option profitably on the expiration date – buying
100 shares at the $30 strike price and promptly selling them for $35 a share, but his profit is only
$500. To determine his net profit, he must subtract the premium, the price he paid for the option,
from his $500 gross profit.

European options, for this reason, are typically considered less valuable than American options,
and can, therefore, usually be purchased at a discount. Another difference from American
options is that European-style options are typically traded over-the-counter (OTC) rather than on
an exchange.

It’s important to note that while traders of European options are limited in terms of when they
can exercise options, they are still free to sell their options to another trader in the secondary
market prior to the option’s expiration. In the example above, the European option trader
could’ve realized a significantly higher profit from merely selling his option when the price of
the underlying stock surged to $60.

What are Bermudan Options?

Bermudan options are different from both American and European options. The contract for a
Bermudan-style option denotes specific days before expiration on which the trader can exercise
his option. The specified exercise dates are usually near the time of the option’s expiration date.
Thus, Bermudan options fall in between American and European options in terms of how much
freedom a trader has to exercise the option.

Let’s use the same scenario as above, that of a trader purchasing a call option on 100 shares of
Company ABC stock, with an expiration date in April. A trader with a Bermudan call option can
elect to buy shares of Company ABC for $30 per share ($30 is the strike price used in all the
examples above).

The only caveat is that he can only exercise his option on four specified days in April, as laid out
in the option contract. He has more freedom of exercise than he would with a European option,
but still considerably less freedom than he’d have with an American option.

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