According to a recent report, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are keeping a close watch on the surging volume in the equity derivatives segment whose volumes have even dwarfed the nominal GDP of the country.
About Derivatives
- Derivatives is a financial instrument which derives its value/price from the underlying assets. Generally stocks, bonds, currency, commodities and interest rates form the underlying asset.
- They could be used as an effective way to hedge risks or as plain speculation on the market trends.
- There are four types of financial derivatives: Futures, Options, swap and Forwards.
- Understanding derivatives is crucial as they provide opportunities to hedge risks, speculate on price movements, and enhance portfolio returns.
- F&Os (Future and Options) in stock trading are considered very risky derivatives because of the potential for significant losses as investors can take big bets with small upfront amounts.
- Another report says that the contribution of corporates and Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) traders in the F&Os (Future and Options) has slowly fallen, and hence, the share of individual investors and proprietary traders has gone up.
