Nifty futures and options represent a market index derivative in India. Every country has its own derivatives market whereby trading is undertaken on various underlying assets such as market indices, stocks, commodities and so on. In the equity market scenario, the most traded derivatives are on stocks and market indices.
Derivatives are the sophisticated financial instruments which are priced as per the underlying asset that they represent. Thus, if it is a stock derivative, then the underlying asset is stocks of a company. Similarly, one can have market derivatives, commodity derivatives and so forth.
The two popular forms of derivatives in the market are futures and options. Futures are tradable contracts by which buyer and seller enter into an agreement that they will transact a commodity at a pre fixed price at a future date. On the other hand, options allow buyers to have the right to buy or sell an underlying asset, though not the actual obligation to carry out such transactions.
When you look at the Indian market for derivatives, the National Stock Exchange has a market index which is traded in the form of derivatives. Known as Nifty, it represents a market index which is formed of as many as 50 company stocks highly rated across the country and representing as many as 24 different sectors in the country. Similarly, one may find the Sensex at the BSE or Bombay Stock Exchange for derivatives trading.
Such trading was commenced for the first time in India in 2001. At this time, the futures contracts were formed based on the Nifty index. The Nifty is known as S&P CNX Nifty since it has been created by Standard and Poor which is a well known index service provider in the world. The Nifty is managed by India Index Services and Products Ltd. or IISL which is again formed by NSE and CRISIL.
There are various reasons why many investors like to consider Nifty futures and options. That is because this is a well diversified market index of the country and it represents 60% of the market capitalization that of the National Stock Exchange. The reward to risk ratio is also higher and many mutual fund companies base their fund’s performances as compared to the Nifty since it provides a reliable benchmark.
Thus, Nifty futures and options are reliable derivatives to invest in and take advantage of speculation. Many investors buy futures contracts based on the Nifty and enter into speculation as regarding the price movements of the various stocks that Nifty represents.
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