Derivatives
- This is a preview of the essay.
To view the full text you must login!
Introduction to derivatives
Introduction
Derivatives are contracts for future delivery of assets at prices agreed at the time of the contract. The quantity and quality of the asset is specified in the contract. The buyer of the asset will make the cash payment at the time of delivery. Derivative product s initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years.
The financial derivatives, derivatives for future delivery of stocks, debt instruments and foreign currencies, came into spotlight in post-1970 period due to the introduction of floating exchange rates. Since their emergence, financial derivatives have become very popular and now they account for about two-third of total transactions in derivative products.
Derivatives Defined
Derivative is a security whose value is derived from the value of the underlying asset in a contractual manner. In the Indian context, the Securities Contracts (regulation) Act, 1956 (SCRA) defines "derivative" to include:
1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.
2...