DERIVATIVE
Derivative Trading
A derivative is a contract or product that derives its value from an underlying asset. Derivatives can include a wide range of such assets including indices, currencies, exchange rates, commodities, stocks or the rate of interest. The buyer and seller of such contracts have opposite estimations of the future trading price. Both the parties bet on the future value of the underlying assets to make a profit.
Derivative trading is similar to a regular buy and sell process. But instead of paying the whole amount up front, a trader pays only an initial margin to a stockbroker.
Algo and HFT Trading
Apart from providing derivative exposure on our platform we also specialize in executing trades at high speed and volume, capturing market opportunities that are often too brief for traditional trading methods
Our offerings consist of a range of trading strategies to diversify your portfolio and reduce overall risk. This includes market making, statistical arbitrage, momentum trading and index based options strategies
Different Types of Derivatives
Depending upon the conditions of a contract, derivatives can be of the following types –
- Futures – A futures contract is a legal agreement between two parties to buy or sell the underlying asset at a predetermined future date and price. The contract is executed directly through a regulated and organised exchange.
- Forwards – Forward contracts are similar to futures except the deal is not made through an organised or regulated exchange. Since these are Over-The-Counter (OTC) contracts, they carry more counterparty risk for both parties involved.
- Options – An options contract gives a trader the right but not an obligation to buy or sell an underlying asset at a predetermined future date and price.
- Swaps – A swap is a contractual agreement between two parties to exchange cash flows at a future date based on a pre-planned formula. Similar to forwards, they are OTC contracts and consequently not traded on exchanges.
Participants in a Derivatives Market
There are four participants involved in derivative trading. They are as follows
Margin Traders
Arbitrageurs
Traders and Speculators
Hedgers
Advantages of Derivative Trading
- Low transaction costs
- Used in risk management
- Market efficiency
- Determines the price of an underlying asset
- Risk is transferable
Disadvantages of Derivative Trading
After knowing what is derivative trading, it’s imperative to be familiarised with its disadvantages as well.
- Involves high risk
- Counterparty risk
- Speculative in nature
