Understanding risks while trading in derivatives - National Institute of Securities Markets (NISM) (2024)

FAQs

Understanding risks while trading in derivatives - National Institute of Securities Markets (NISM)? ›

If a counterparty defaults on a derivative contract, the investor may not receive the full value of the contract, leading to losses. However, this risk does not exist in the case of exchange-traded derivatives, as the clearing house or clearing corporation acts as the counterparty.

Counterparty risk, or counterparty credit risk, arises if one of the parties involved in a derivatives trade, such as the buyer, seller, or dealer, defaults on the contract. This risk is higher in over-the-counter, or OTC, markets, which are much less regulated than ordinary trading exchanges.

SEBI establishes the regulatory framework governing derivatives in India. It formulates rules, regulations, and guidelines concerning the trading, clearing, and settlement of derivative contracts.

Derivative trading is a complex yet interesting concept. One of the main advantages of derivatives is that you don't require any special tools or technologies to start trading in them. By opening a Demat account and a trading account in India, you can get started with buying and selling derivatives.

The trend has been more or less same for last few years. The equity derivatives market and equity cash market has grown with a CAGR growth of 39.24% and 19.42% respectively since F.Y. 2013-14 till F.Y. 2019-20.

The main drawbacks of derivatives include counterparty risk, the inherent risks of leverage, and the fact that complicated webs of derivative contracts can lead to systemic risks.

Because the value of derivatives comes from other assets, professional traders tend to buy and sell them to offset risk. For less experienced investors, however, derivatives can have the opposite effect, making their investment portfolios much riskier.

1.1 In India, different derivatives instruments are permitted and regulated by various regulators, like Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Forward Markets Commission (FMC).

The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country. 5. The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading.

CFTC Overview

The Commodity Futures Trading Commission is an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.

What is the average salary of a derivatives trader in India? ›

Average salary for a Derivatives Trader in India is 8.7 Lakhs per year (₹72.9k per month). Salary estimates are based on 637 latest salaries received from various Derivatives Traders across industries.

Yes, it is possible for Indian residents to trade in US index options. However, there are a few things to keep in mind. First, residents of India need to have a foreign brokerage account to trade US index options.

Unlike equity, derivatives are financial instruments traded through stock exchanges or Over-The-Counter (OTC). While almost all equity trades occur through an exchange, derivatives trades may be executed within or without the stock exchange framework. Some types of derivatives are futures, options, forwards, and swaps.

How much does an Equity Derivatives Broker make? As of Apr 29, 2024, the average annual pay for an Equity Derivatives Broker in the United States is $95,027 a year. Just in case you need a simple salary calculator, that works out to be approximately $45.69 an hour. This is the equivalent of $1,827/week or $7,918/month.

Futures and options (F&O) are derivative products in the stock market. Since they derive their values from an underlying asset, like shares or commodities, they are called derivatives.

The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.

Risk-averse investors use derivatives to enhance safety while risk-loving investors like speculators conduct risky, contrarian trades to improve profits. This way, the risk is transferred. There are a wide variety of products available and strategies that can be constructed, which allow you to pass on your risk.