Derivatives
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Derivatives:
The long and short of it
Submitted by:
Deepak Gera DMS, IITD Batch of 2010
Rishi Singhal DMS, IITD Batch of 2010
What are Derivatives?
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as: -
A Derivative includes: -
A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; a contract which derives its value from the prices, or index of prices, of underlying securities;
Are Derivatives Disastrous?
Disasters involving derivatives have captured the attention of the financial sector worldwide. Names like Barings, Proctor & Gamble, Orange County, etc. have come to symbolize the "dangers of derivatives". As derivatives grow to have an increasing importance in India's economy, what does this mean for us? A single trader brought down Barings Bank -- is State Bank similarly vulnerable? Specifically, on the equity market, where the first exchange--traded derivatives are likely to commence trading in early 1998, what new pitfalls lie in store for us?
The first question that we will address is whether there is truly a rash...
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