Understanding risks while trading in derivatives - National Institute of Securities Markets (NISM) (2024)

FAQs

Understanding risks while trading in derivatives - National Institute of Securities Markets (NISM)? ›

While derivatives can be a useful risk-management tool for investors, they also carry significant risks. Market risk refers to the risk of a decline in the value of the underlying asset. This can happen if there is a sudden change in market conditions, such as a global financial crisis or a natural disaster.

Derivative contracts are short-term financial instruments that come with a fixed expiry date. The underlying asset can be stocks, commodities, currencies, indices, exchange rates, or even interest rates. Derivative trading involves both buying and selling of these financial contracts in the market.

Liquidity risk applies to investors who plan to close out a derivative trade prior to maturity. Overall, liquidity risk refers to the ability of a company to pay off debts without big losses to its business. To measure liquidity risk, investors compare short-term liabilities and the company's liquid assets.

SEBI establishes the regulatory framework governing derivatives in India. It formulates rules, regulations, and guidelines concerning the trading, clearing, and settlement of derivative contracts.

Equity derivative contracts increased by 56.5% compared to 18.4% in 2019, and this was the common trend across all classes of equity derivatives. At the end of 2020, volumes amounted to just under 25.98 billion contracts.

Derivatives Trader salary in India ranges between ₹ 1.8 Lakhs to ₹ 18.0 Lakhs with an average annual salary of ₹ 9.0 Lakhs. Salary estimates are based on 607 latest salaries received from Derivatives Traders. 0 - 7 years exp. 0 - 7 years exp.

While derivatives can be a useful risk-management tool for investors, they also carry significant risks. Market risk refers to the risk of a decline in the value of the underlying asset. This can happen if there is a sudden change in market conditions, such as a global financial crisis or a natural disaster.

Derivative instruments can involve risks, such as a high degree of implicit leverage and less transparency in some cases than cash instruments, as well as basis, liquidity, and counterparty credit risks.

The main challenges facing the derivatives market include market risk, liquidity risk, credit and counterparty risk, legal risk, and transactions risk.

Who regulates derivatives trading? ›

The Stock Exchange operating under the regulatory framework of SEBI facilitates derivatives trading in commodities. It offers a SEBI approved standardised derivatives contract on its trading platform. The contract specifications are designed by the Stock Exchange in consultation with various stakeholders.

SEBI | Commodity Derivatives Market Regulation Department (CDMRD)

The Commodity Futures Trading Commission is an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.

How much does an Equity Derivatives Broker make? As of Apr 6, 2024, the average annual pay for an Equity Derivatives Broker in the United States is $95,027 a year. Just in case you need a simple salary calculator, that works out to be approximately $45.69 an hour. This is the equivalent of $1,827/week or $7,918/month.

The primary purpose of equity is capital appreciation and ownership, while derivatives are used for hedging, speculation, and leveraging. Equity performance is influenced by company and market trends, while derivatives strategies may adapt based on current market conditions.

An equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset. For example, a stock option is an equity derivative, because its value is based on the price movements of the underlying stock.

NSE: World's Largest Derivatives Exchange For 5th Year, Ranks 3rd Globally In Equities Segment. In the year 2023, the National Stock Exchange of India (NSE) will hold the title of largest derivatives exchange in the world for a fifth year running.

By allowing investors to unbundle and transfer these risks, derivatives contribute to a more efficient allocation of capital, facilitate cross-border capital flows, and create more opportunities for portfolio diversification. Thus, financial derivatives are essential for the development of efficient capital markets.

Derivatives market is the financial market for derivatives which are a group of products including futures and options whose value is derived from and/or is dependent on the value of a different underlying asset such as commodities, currency, securities etc.

In the past few years, efforts led by Indian policymakers have driven significant expansion of the OTC derivatives market, with its notional value reaching around $9.27 trillion in 2022, making it the 20th largest OTC derivatives markets globally.