Meaning and Definition of Derivatives

    This type of security derives its value from the underlying asset. The value of the backing asset determines the value of the derivative security. A derivative security is mainly used for the purpose of risk management. The risks arising out of price fluctuation may be managed with the help of derivative securities.

    These securities help in breaking down the risk in several components, including risk arising out of interest rate, credit rate, exchange rate risk, etc. There are several types of derivative securities available in India. For example, the forex market uses a type of derivative called forwards.

    Derivatives are financial instruments whose value is derived from one or more underlying financial assets. The underlying instrument could be financial security, a securities index, or some combination of securities and indexes. Derivatives are financial instruments that have no intrinsic value.

    They hedge the risk of owning things that are subject to unexpected price fluctuations, for example, foreign currencies, stocks, and government bonds.

    A simple example of derivative is butter, which is a derivative of milk. The price of butter depends upon the price of milk, which in turn depends upon the demand and supply of milk.

    In the Indian context, the Securities Contracts (Regulation) Act, 1956 defines “derivative” to include:

    1. 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.
    2. A contract that derives its value from the prices or index of prices of underlying securities.

    Therefore, derivatives are specialized contracts to facilitate temporary for hedging, which is protection against losses resulting from unforeseen price or volatility changes. Thus, derivatives are an essential tool in risk management.

    Disclaimer: While we make every effort to update the information, products, and services on our website and related platforms/websites, inadvertent inaccuracies, typographical errors, or delays in updating the information may occur. The material provided on this site and associated web pages is for reference and general information purposes only. In case of any inconsistencies between the information provided on this site and the respective product/service document, the details mentioned in the product/service document shall prevail. Subscribers and users are advised to seek professional advice before acting on the information contained herein. It is recommended that users make an informed decision regarding any product or service after reviewing the relevant product/service document and applicable terms and conditions. If any inconsistencies are observed, please reach out to us.

    Latest Articles

    Related Stories

    Leave A Reply

    Please enter your comment!
    Please enter your name here

    Join our newsletter and stay updated!