Every country has their own derivatives market set up to facilitate the financial trading in various instruments including derivatives. Derivatives are a sophisticated kind of financial instruments which derive their value from that of an underlying asset, be it stocks, foreign exchange, commodities, market indices and so forth.
Futures and options are the two common forms of derivatives that most investors take up for trading. These not only diversify their portfolio but also help them hedge off the risks of other finical instruments as well. Futures are contracts which are traded in the market and are agreements between buyers and sellers to agree to buy a certain asset or commodity at a fixed price at a future date. On the other hand, options are contracts that give the buyer the right to buy or sell an underlying asset but not the actual obligation.
If we look at the Indian markets, NIFTY represents a market index which is computed from the performance of high ranking stocks amongst the various stocks listed in the National Stock Exchange or NSE. Nifty market index consists of around 50 companies stocks which come from various sectors, as many as 24 different sectors of the Indian industry. These companies in the Nifty index may vary based on several considerations. BSE has a similar market index that is traded as a derivative known as SENSEX.
Many mutual fund companies base their fund’s performance against the Nifty index as a benchmark. Derivatives trading based on the Nifty index was commenced in 2001 when the Nifty futures contracts were formed. Index futures consist of contracts which consist of the underlying asset as the stock index, in this case Nifty. This allows an investor to look at the market based on the composite performance of the index and is a reliable avenue for investment.
The Nifty futures and options allow investors to speculate and when there is a major surge in the market, investors can purchase futures contract so that they can benefit as the Nifty index continues the upward trend. The main index futures contracts in India are based on the BSE Sensex and the S&P CNX Nifty. Most contracts are valid for three months and every such contract expires on the last Thursday of the month when its delivery date falls.
Thus, Nifty futures and options provide a reliable source of investment for those who are willing to trade in derivatives. The composite market index gives a good indication of the industrial growth and hence, provides less volatile opportunities to speculate with.