Markets: Static Concepts- 2 | Economy for UPSC 2024 (Pre & Mains) PDF Download

 Page 1


MARKETS
STATIC CONCEPTS
Page 2


MARKETS
STATIC CONCEPTS
DERIVATIVES – OPTIONS, FUTURES, 
FORWARDS
Derivatives are products whose value is derived from the value of one or more basic variables, 
which are called Underlying Assets.
The underlying asset can be equity, index, foreign exchange (Forex), commodity or any other 
asset. This means that any instrument that derives its value on its underlying equity, index, foreign 
exchange (Forex), commodity or any other asset, is a Derivative Instrument.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices.
Forward & Future Contract: 
A forward contract is a customized contract between two parties to buy or sell an asset at a 
specified future time at a price agreed upon today. 
Futures contracts are special types of forward contracts in the sense that they are standardized 
exchange-traded contracts, such as futures of the Nifty index.
Page 3


MARKETS
STATIC CONCEPTS
DERIVATIVES – OPTIONS, FUTURES, 
FORWARDS
Derivatives are products whose value is derived from the value of one or more basic variables, 
which are called Underlying Assets.
The underlying asset can be equity, index, foreign exchange (Forex), commodity or any other 
asset. This means that any instrument that derives its value on its underlying equity, index, foreign 
exchange (Forex), commodity or any other asset, is a Derivative Instrument.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices.
Forward & Future Contract: 
A forward contract is a customized contract between two parties to buy or sell an asset at a 
specified future time at a price agreed upon today. 
Futures contracts are special types of forward contracts in the sense that they are standardized 
exchange-traded contracts, such as futures of the Nifty index.
There are two important roles of the Futures markets.
Price Discovery
Hedging of price Risk
Page 4


MARKETS
STATIC CONCEPTS
DERIVATIVES – OPTIONS, FUTURES, 
FORWARDS
Derivatives are products whose value is derived from the value of one or more basic variables, 
which are called Underlying Assets.
The underlying asset can be equity, index, foreign exchange (Forex), commodity or any other 
asset. This means that any instrument that derives its value on its underlying equity, index, foreign 
exchange (Forex), commodity or any other asset, is a Derivative Instrument.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices.
Forward & Future Contract: 
A forward contract is a customized contract between two parties to buy or sell an asset at a 
specified future time at a price agreed upon today. 
Futures contracts are special types of forward contracts in the sense that they are standardized 
exchange-traded contracts, such as futures of the Nifty index.
There are two important roles of the Futures markets.
Price Discovery
Hedging of price Risk
In the Indian securities markets, the term ‘bon d’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and 
the term ‘debentur e’ is used for instruments issued by private corporate sector.
Page 5


MARKETS
STATIC CONCEPTS
DERIVATIVES – OPTIONS, FUTURES, 
FORWARDS
Derivatives are products whose value is derived from the value of one or more basic variables, 
which are called Underlying Assets.
The underlying asset can be equity, index, foreign exchange (Forex), commodity or any other 
asset. This means that any instrument that derives its value on its underlying equity, index, foreign 
exchange (Forex), commodity or any other asset, is a Derivative Instrument.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices.
Forward & Future Contract: 
A forward contract is a customized contract between two parties to buy or sell an asset at a 
specified future time at a price agreed upon today. 
Futures contracts are special types of forward contracts in the sense that they are standardized 
exchange-traded contracts, such as futures of the Nifty index.
There are two important roles of the Futures markets.
Price Discovery
Hedging of price Risk
In the Indian securities markets, the term ‘bon d’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and 
the term ‘debentur e’ is used for instruments issued by private corporate sector.
Options
An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying 
at a stated date and at a stated price. 
While a buyer of an option pays the premium and buys the right to exercise his option, the 
writer of an option is the one who receives the option premium and therefore obliged to 
sell/buy the asset if the buyer exercises it on him.