A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. Price Discovery Futures market prices depend on a continuous flow of information from around the world and require a high degree of transparency. A broad range of factors impact supply and demand of assets (commodities in particular) – and thus the current and future prices of the underlying asset on which the derivative contract is based. This kind of information and the way people absorb it constantly changes the price of a commodity. This process is known as price discovery. Risk Management Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former. This process can fall into the categories of hedging and speculation. Hedging has traditionally been defined as a strategy for reducing the risk in holding a market position while speculation referred to taking a position in the way the markets will move. Today, hedging and speculation strategies, along with derivatives, are useful tools or techniques that enable companies to more effectively manage risk. Reduce Market Transaction Costs Because derivatives are a form of insurance or risk management, the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions. FUTURES In futures trading, you take buy/sell positions in index or stock(s) contracts having a longer contract period of up to 3 months. Trading in FUTURES is simple! If, during the course of the contract life, the price moves in your favour (i.e. rises in case you have a buy position or falls in case you have a sell position), you make a profit. Presently only selected stocks, which meet the criteria on liquidity and volume, have been enabled for futures trading. OPTIONS An option is a contract, which gives the buyer the right to buy or sell shares at a specific price, on or before a specific date. For this, the buyer has to pay to the seller some money, which is called premium. There is no obligation on the buyer to complete the transaction if the price is not favorable to him. To take the buy/sell position on index/stock options, you have to place certain % of order value as margin. With options trading, you can leverage on your trading limit by taking buy/sell positions much more than what you could have taken in cash segment. To know what’s happening in the Derivatives, Click Here