Derivatives are financial securities whose value is derived from another "underlying"
financial security. Options, futures, swaps, swaptions, structured notes are all
examples of derivative securities. Derivatives can be used hedging, protecting against
financial risk, or can be used to speculate on the movement of commodity or security
prices, interest rates or the levels of financial indices. The valuation of derivatives
makes use of the statistical mathematics of uncertainty, which is very complex.
The key to understanding derivatives is the notion of a premium. Some derivatives
are compared to insurance. Just as you pay an insurance company a premium in order
to obtain some protection against a specific event, there are derivative products
that have a payoff contingent upon the occurrence of some event for which you must
pay a premium in advance.
The word 'derivative' originates from mathematics and refers to a variable, which
has been derived from another variable. Derivatives are so called because they have
no value of their own. They derive their value from the value of some other asset,
which is known as the underlying.
For example, a derivative of the shares of Infosys (underlying), will derive its
value from the share price (value) of Infosys. Similarly, a derivative contract
on soybean depends on the price of soybean.
Derivatives are specialized contracts which signify an agreement or an option to
buy or sell the underlying asset of the derivate up to a certain time in the future
at a prearranged price, the exercise price.
The contract also has a fixed expiry period mostly in the range of 3 to 12 months
from the date of commencement of the contract. The value of the contract depends
on the expiry period and also on the price of the underlying asset.
Futures & Options Segment is another new segment where trading on derivatives contract
takes place. The Trading Member is, as in Stock Market segment, required to enter
all the orders in the system. The Trading Member shall disclose to the Exchange
at the time of order entry that the order is on his own account or on behalf of
clients. The client is required to place his order to the Member in writing in the
Order Placement Form specified by the Exchange
in which the client will be required to specify the buy or sell orders as either
an open order or a close order.
If the client requires an order to be modified after the order has entered the system
but has not been traded, the Client is required to give the request in writing in
the Modification Request Form specified by
If the client requires any of his order to be cancelled after the order has been
entered in the system but has not been executed, the same shall be given in writing
in the Order Cancellation Form specified by
The Trading Member shall provide the client with a copy of the trade confirmation
slip as generated on the Trading System, forthwith on execution of the trade and
with a contract note for the trade executed
Orders entered into the Trading System by Trading Members shall be subject to various
validation requirements as specified by the F&O Segment of the Exchange from time
to time including trading parameters, turnover limits, exposure limits and/or other
restrictions placed on traded derivatives contracts. Orders that do not meet the
validation checks shall not be accepted by the Trading System. Orders in the Normal
market shall be matched on price-time priority basis. The best buy order shall match
with the best sell order. For trading on price, the best buy order would be the
one with the highest price and the best sell order would be the one with the lowest
Trades generated on the system are irrevocable and ‘locked in’. The Trading Member
shall make available to his client the system generated trade number through Trade Confirmation Slip. The Trading Member
shall issue a contract note to his constituents for trades executed on his behalf.
The contract note shall be signed by a Trading Member or his Authorised signatory
or constituted Attorney and shall be time stamped with the time of receipt of order
and the time of execution of order. The Brokerage charged to the client shall be
indicated separately from the price, in the contract note.