What are derivatives?

The most commonly traded derivatives on exchanges are futures and options.

A futures contract is an agreement between two parties to buy or sell an underlying instrument at a specific time in future at an agreed price determined today. Its value is determined by the expected future price fluctuation in the underlying instrument such as commodity prices, interest rates, market indices and share prices.

Futures contracts in most cases are squared off prior to its expiry dates, meaning a trader who bought a futures contract closed off his position by selling the same quantity and type of futures contract he bought earlier or vice versa.

An option however, gives the buyer the right, but not the obligation, to buy or sell a certain quantity of the underlying instrument at a specific price within a specific time period by paying a premium. The buyer has the right to exercise the contract either buy or sell, or to allow the contract to lapse.

Why Derivatives Trading?

• Leverage on low margin. A trader only pays low margin in order to trade in derivatives.
• Easy access to commodity and financial markets.
• Opportunity to trade during bullish and bearish markets. A trader has the opportunity to make profit during bullish and bearish markets depending on his trading position.