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.