What is derivative trading and why is it the headline in India right now?
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| Derivative trading in India |
News:
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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Thank
You!
Million-$-Knowledge
