What is a Derivatives Market?
The word ‘Futures Contract’ reminds us of ‘Derivatives’. As the name suggests, these instruments derive their value from assets like shares, commodities, or foreign currencies underlying them.
Simply speaking, a Derivative is an agreement to buy the underlying asset at a predetermined future date and price. In such contracts, the buyer stands to gain if the price agreed upon before is lower than the market price on the date of the actual sale, otherwise, he incurs a loss.
What makes Futures and Options, the two main types of Derivatives, attractive is that they trade on well-regulated exchanges with dedicated clearinghouses, which means that no party can default on their part of the promise.
Can you guess which is the world’s largest derivatives exchange by volume? (Hint: It’s in India)