Chapter 17 - Equity Derivatives : Introduction

Financial derivatives

As you are aware the financial derivatives have become increasingly popular and most commonly used in the world of finance. This has grown with phenomenal speed all over the world that now it is called as the derivatives revolution. A large variety of derivative contracts have been launched at exchanges across the world. The basic purpose of these instruments is to provide commitments to prices for futures dates for giving protection against adverse movement in future prices. Also provide opportunities to earn profit for those persons who are ready to go for higher risks.

Derivatives were originally designed in India to hedge food products and some precious metals. Starting from a controlled economy, India has moved towards a world where prices fluctuate every day. The introduction of risk management instruments in India gained momentum in the last few years due to the liberalization process. Hence, Derivatives are an integral part of the liberalization process to manage risk. NSE gauging the market requirements initiated the process of setting up derivatives market in India. Indian capital market finally acquired the much awaited international flavour when it introduced trading in futures and options on National Stock Exchange (NSE) in 2000 and on Bombay Stock Exchange (BSE) in 2001. So in this chapter we are going to cover mostly about derivatives and its instruments for trading in equity markets.