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What is derivative trading and why is it the headline in India right now?

What is derivative trading, Finance, News
Derivative trading in India


SEBI has banned derivative trading of 7 agricultural commodities for 1 year.

This ban has been imposed on futures trading on the National Commodity and Derivatives Exchange (NCDEX).

These crops include gram, wheat, paddy (except basmati rice), soybean, mustard, crude palm oil, and moong (kidney bean).

This step has been taken to check rising inflation.

What is Derivative Trading?

Derivative trading is a financial contract that relies on underlying assets.

Underline assets are financial assets on which the values of derivatives are based.

For example, sugarcane is a derivative of sugarcane, that is, sugarcane is the underlying asset for sugarcane. If the price of sugarcane fluctuates, it will affect the sugarcane also.


Derivatives Trading Types:

1. Forward and future trading

2. Options trading

3. Swap trading


Forward and Future Trading:

A futures trading takes place between two people for a further date, due to which the security of both the buyer and seller is maintained.

Under this, the buyer and seller enter into an agreement on a fixed price for a specified quantity of goods.

Therefore, if there is any fluctuation in the price of that commodity in the future, it will not affect both the buyer and seller as it is decided in advance.


Option Trading:

Under options trading, the client has the right, but not the obligation, to buy or sell a stock at a specified price for a future date.

In this trading, the buyer also gets the facility to buy or not on the specified date.


Swap Trading:

Swap trading is a derivative contract in which two parties trade cash flows or liabilities from two different financial instruments.

BSE and NSE provide the facility of derivative trading of shares and commodities for trading.

Apart from this, MCX, NCDEX, and ICEX also allow the trading of commodity deals.


What is NCDEX?

NCDEX is an online commodity exchange in India that primarily deals in agricultural commodities.

NCDEX is a Public Limited Company established on 23rd April 2003 under the Companies Act, 1956.

It was established by some of the leading financial institutions like ICICI Bank Limited, NSE and NABARD, etc.

It is regulated by SEBI and its headquarter is located in Mumbai.


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