Derivatives are financial instruments that derive value from the underlying instruments like stocks, currency, interest rate or commodities. Derivative Instruments can be used for Hedging (to save from probable loss against unexpected drop or rise in prices of underlying asset / product), Arbitrage (to take benefit of price difference of same underlying asset / product in different market) or just taking Speculative call to make profit.

There are two kinds of Derivatives instruments being traded in India. They are known as Futures and Options. Future / Option trading is available on Indices, individual Stocks, interest rate and various Agro and Metal commodities. Future can be bought / sold on exchanges at a predetermined price and date. Options can be bought / sold on exchange and gives the buyer a right to buy / sell the underlying within the predetermined period and at his price advantage without such an obligation on his part.

Advantages:

• Equity Derivatives : Equity Derivatives can be used to hedge an equity portfolio. It can be also used for arbitrage which may arise from difference between future and spot price. Future trading also provides opportunities to take benefit of short term price movement. Whereas Option trading provides the lucrative trading opportunities with low risk. There are so many derivative strategies based on mathematical calculation like butterfly, strangle, straddle, calendar spread etc. to generate profit in short to mid-term.
• Commodity Derivatives : Commodity can be broadly classified in two categories i.e. Agro and Metal. Commodity derivative trading provides an opportunity to commodity producers, users, traders and investors to manage their financial and business risks. Producers, Consumers or Intermediaries of commodities can manage / hedge their risk to changes in the price of their products. Investors / Traders can also buy / sell commodities through the use of these instruments to generate profit.
• Currency Derivatives : Currency Derivatives is a future / option contract of base currency v/s any other currency. For example, USD / INR signifies a rate of US $ against Indian Rupee.Currency Derivatives can be used by importer / exporter, traveller or trader. An importer can buy currency future/option to hedge risk of devaluation of currency. Same way exporter can sell currency future/option to hedge risk of appreciation of currency. Traders can take benefits of price fluctuation by buying / selling currency derivatives.
• Interest Rate Derivatives : Interest Rate derivatives is an instrument to take hedge/arbitrage position against change in interest rate in future.