DERIVATIVES
- ECONOMY
News:
RBI defers exchange
traded currency derivatives norms
What's
in the news?
●
The Reserve Bank of India (RBI) deferred
the implementation of its new norms for exchange traded currency derivatives
(ETCD) market to May 3 from April 5.
Key
takeaways:
●
This comes after market participants
raised concerns over participation in the ETCD market and the run up to the
April 5 deadline saw a sharp rise in volatility in the forex market.
●
The regulatory framework has been
reiterated in the Foreign Exchange Management (Foreign Exchange Derivative
Contracts) Regulations, which states that a person may enter into an ETCD contract involving the rupee only for the
purpose of hedging a contracted exposure.
Derivatives:
●
Derivatives are financial instruments whose value
is derived from the value of an underlying asset, such as stocks, bonds,
commodities, currencies, or market indices.
●
They allow investors to speculate on or
hedge against future price movements of the underlying asset without owning it
outright.
Types
of Derivatives:
●
The two main classes of derivatives are
futures and options.
Futures:
●
Futures are financial contracts that
obligate the buyer to purchase, or the seller to sell, an asset at a predetermined future date and price.
●
Underlying
Assets: Futures contracts can be based on various underlying
assets, including commodities (e.g., agricultural products, metals), financial
instruments (e.g., stocks, bonds), or market indices.
●
Trading
on Exchanges: Unlike forward contracts, futures
contracts are traded on organized
exchanges. The exchange acts as an intermediary, ensuring the fulfillment
of contract obligations.
●
Payment
and Margin: A small upfront payment, known as margin,
is made when entering into a futures contract. The buyer and seller are
required to settle the contract by paying or delivering the agreed-upon amount
at the contract’s expiration.
Options:
●
Options are financial contracts that
provide the holder with the right (but not the obligation) to buy or sell an
underlying asset at a predetermined
price (strike price) before or at the option’s expiration date.
●
Call
Options: A call option gives the holder the right to buy the
underlying asset.
●
Put
Options: A put option gives the holder the right to sell the
underlying asset.
●
Flexibility:
Options provide flexibility to the buyer, who can choose whether to exercise
the option based on market conditions.
●
Premium
Payment: The buyer of an option pays a premium to the seller
for the right conveyed by the option. The seller, in turn, receives the premium
but has an obligation to fulfill the contract if the buyer decides to exercise
the option.