What is Derivatives market with example

Derivative Market


What is a derivatives market?


Derivatives Meaning

If we look at the definition of what is derivative, then the definition of derivative says that:


The Derivative is an instrument which value is derived from one or more underlying assets/things/products


A derivative is a product, an instrument, and a contract in relation to the stock market, such as the future and option, whose price is determined by the underlying asset, ie stock or index.

Like - A nifty future is available, its price is based on the price of Nifty.

And as the definition states, for derivative production to occur, one must settle something, above or from which derivatives can be created.

DERIVATIVE EXAMPLE -

The gold ring is made of gold, so the price of the gold ring is determined by the exact amount of immature gold on the market.

Therefore, the Simple gold ring is a derivative of gold, and if the price of gold in the market goes up, then the price of the gold ring will also increase, and if the price of gold decreases in the market, then the price of the gold ring can decrease. 

This is a simple example of something else, where gold is a basic asset of gold.

Apart from this, yogurt is also made of derivatives of milk.

To make curd, the curd is needed for milk, if there is no milk, not curd, that is why curd is stuck in milk, so we can say that curd is derived from milk,

Yes, yogurt is derivative. And after today, whenever you look at a curd, eat curd or listen to the name of a curd, understand that the curd is derived from milk.

One step forward… if…

Curd is made of - Ghee and butter, and Ghee and butter are derivatives of curd, or you can say that curd or butter is also a derivative of milk… because… be it curd, butter or ghee… all of them have milk. Is only possible.

If there is no milk then there is no curd.

That's fine, We will not go into the milk and all this in-depth. Here we have to understand that curd is a very good example of derivatives.

But what is the relationship between yogurt and the stock market?

What is the relationship between yogurt and the stock market (derivative)

It is true that there is no relationship between curd and the stock market, but from what we have taken as an idea, that concept is very important in the stock market.

Because there are two segments in the stock market:

  1. Cash Segment
  2. Derivatives Segment

And we also know the derivatives segment as Future and Option Segment.

That is, a stock future in the stock market is a derivative, whose value is derived from its underlying stock price. And it is the same with the option, the option is also a derivative, which is derived from the price of a stock or index.

For example, Reliance Future Contract is a derivative, and in this case, Reliance will depending on the futures contract price, from the stock price of Reliance.

And just like that, the Nifty option contract is a derivative, and the price of the Nifty option contract will be derived from Nifty.

Why are derivatives so important?

If we talk about what is the import of derivatives?

So derivatives are a very important part of the stock market or capital market, and the simple reason for this is that if you look at the data of the stock market, you will find that in these terms of turnover, many times more business than cash segment is in the derivatives segment. Happens, and if one wants to work in the stock market, then it becomes very important for him to understand the concept of derivatives.

I hope that you must understand the concept of derivatives even and you will surely remember the concept of derivatives and its definition, its meaning.

DERIVATIVE OR UNDERLYING ASSET :

As we have seen there are two things in derivatives:-

First - the derivative product (contract) is the underlying asset of the product (on the basis of which the price of the derivative changes).

Now an important question - whose price will be higher - of the derivatives or the underlying (asset/stock/index) of that derivative.

In other words,

For example, whose price will be more curd or milk? 

(Note that curd is derivative and milk is intrinsic)

So the answer will be that -

Because yogurt is made from milk, it takes time for milk to become curd, is processed, and adding the cast of that process increases the cost of curd more than milk.

Like - if the price of milk is x and the cost that will come to make that milk curd, let's say y.

So the price of yogurt will be = x + y + profit for the seller.

And if the price of milk increases then the price of curd will increase automatically… that is, it means that - usually The value of the derivative is higher than its underlying asset.

And that is exactly what is happening in the stock market-based segment.

And the price of the derivative that is in it is also decided in a similar way, in which the market price of the underlying asset (stock/index/commodity) + contract carry price + margin of seller / buyer together make the price of the derivative.

WHAT IS A DERIVATIVE- SUMMARY

So now if you want to understand the derivatives in the final stock market, then it will be something like -

Derivative - is a financial instrument / contract / product whose value derives from another stock / index / commodity.

Note that - In the stock market there are derivative legal contracts, and all the terms and conditions of this contract are predetermined and are legally bounded agreements.

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