Derivatives Part 1- The Introduction

Derivatives- The Introduction

Let's start the topic with understanding the Indian capital Market.

Indian Capital Market:

Capital market is a market where securities are bought and sold. This capital market provides many support services. There are two authorities in India named as:

1. Security Exchange Board of India (SEBI).
2. Reserve Bank of India (RBI).

The Security Exchange Board of India (SEBI) along with the Reserve Bank of India (RBI), the two regulatory authority for the Indian Security market, to protect the investors and to improve the structure of the capital market in India.

The capital market of India is divided into two market:

1. Primary Market:
• It is the market where the security are bought and sold for the very first time like IPO, etc.
2. Secondary Market:
• It is the market where the security are further bought and sold by the customers in the market Like FPO, etc.

Definition of Derivatives:

• Derivative is a Financial Instrument which derives its value from an Underlying Assets.

• Derivatives is itself is a contract between two or more parties and the price of it fluctuates according to its underlying assets.

In General or Simple word:

• It is something which is depended upon something. 

Breaking Down the Definition:

The Definition is divided into two parts to understand the Derivatives better.

Financial Instrument:

• A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

• A financial instrument is a monetary contract between parties.

• We can create, trade, or modify them.

• We can also settle them.

• A financial instrument may be evidence of ownership of part of something, as in stocks and shares.

• Bonds, which are contractual rights to receive cash, are financial instruments.

Underlying Asset:

Underlying assets means anything on which we can bet. Below are the underlying asset:

1. Shares
2. Debentures
3. Bonds
4. Gold
5. Silver
6. Other Commodity
7. Currency
8. Weather

Anything can be the underlying asset.

For the detailed discussion, it is recommended to view the Derivatives Introduction by Nayan Parihar through the following link:

https://www.youtube.com/watch?v=JVWk-j1mMWM

For more such interesting Topics and Discussion, Follow and Subscribe.