Exchange Traded Derivatives

Exchange Traded Derivatives

Unlike the OTC instruments, these are traded over an exchangeRegulated market place where capital market products are bought and sold through intermediaries. . So in these contracts Exchange play an intermediately to all transactions.

• There is a third party in ETD and that is Exchange.

The exchange provides a platform, where the buyers and sellers can come together and the orders are matched. Once this orders are matched, the exchange becomes seller to the buyer and buyer to the seller.

• Exchange saves one party from the counterparty risk and default of another party.

To do that the exchange charges a marginAn advance payment of a portion of the value of a stock transaction. The amount of credit a broker or lender extends to a customer ..... money, from both sides as collateral. The margin money varies depending upon the day to day price movements.

• ETDs can be used for both speculation and hedging.

The Exchange Traded Derivatives are of two types viz. Futures and Options.

• Futures: Futures is a contract between two parties, in which one party agrees to buy an underlyingThe designated financial instrument which must be delivered in completion of an option or futures contract. asset from the seller at a future date at a price which is agreed upon today.
  • The terms of the agreement are decided by the exchange and not the parties.
  • The prices are NOT decided by the exchange.
  • Both buyers and sellers are protected by a margin money which is equal to the loss of one party in the futures.
  • In India the clearingSettlement or clearance of accounts, for a fixed period in a Stock Exchange. corporations such as NSSCL (National Securities Clearing Corporation Limited) protects the parties against the counterparty risk.
• Options: Option is a contract between two parties, in which one party has an option to buy an underlying asset from the seller at a future date at a price which is agreed upon today. One party gives another party the Option or right but NOT the obligation.
  • In India, the trading in options in interest rate derivativesDerivative is a product whose value is derived from the value of one or more basic variables. The basic variables are underlying assets, index or ..... is NOT allowed as of now.