In the financial market, derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, commodities, currencies, or indices. In Class 10 Introduction to Financial Markets, derivatives are introduced to develop a basic understanding of futures, options, forwards, and swaps, along with their role in the secondary market and overall economy.
Derivatives Class 10 Notes
What are the types of derivatives?
Derivatives are financial contracts whose value is derived from an underlying asset such as stocks, indices, commodities, currencies or interest rates.
- Forwards: A forward contract is a customised contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.
- Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.
- Options: An option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. Options are of two types – call and put options:
- ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date.
- ‘Puts’ give the buyer the right, but not the obligation, to sell a given quantity of underlying asset at a given price on or before a given future date.
- Warrants: Options generally have lives of up to one year. The majority of options traded on exchanges have a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.
What is an ‘Option Premium’?
At the time of buying an option contract, the buyer has to pay a premium. The premium is the price for acquiring the right to buy or sell. It is the price paid by the option buyer to the option seller for acquiring the right to buy or sell. Option premiums are always paid upfront.
What is ‘Commodity Exchange’?
A commodity exchange is a marketplace where people trade commodities like gold, oil, wheat or cotton. But instead of physical trading, now most of the trade happens through futures contracts, which are the agreements to buy or sell the commodity at a future date for a set price. Commodity exchange helps farmers, companies and investors lock in prices so they don’t lose money if prices change.
What is meant by ‘commodity’?
The Forward Contracts (Regulation) Act, 1952, allowed only certain goods approved by the government, like agricultural products (wheat or cotton), minerals (iron ore) and fossil-based items (like crude oil), to be traded in official commodity exchanges such as MCX and NCDEX. These exchanges make trading organised, safe and fair.
What is the Commodity Derivatives Market?
Commodity derivatives market trade contracts for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc., or precious metals like gold, silver, etc.
What is the difference between commodity and financial derivatives?
In a financial derivative, you trade something which is not physical; for example, you buy a contract based on the price of a company stock. When the contract ends you get money; there is no physical item delivered and no need for storage or warehouses. Commodity derivatives are trades in real physical goods; for example, you buy a contract for 100 bags of wheat. If the contract is done physically, then you will receive the wheat; you need a warehouse to store it.
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