A Derivative is an instrument whose value is derived from the value of underlying assets, which may be commodities, foreign exchange, bonds, stocks, stocks indices, etc. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.

For example, in the case of a wheat derivative, say ‘wheat futures,’ the underlying asset is wheat, which is a commodity. The value of ‘wheat futures’ will be derived from the current price of wheat. Similarly, in the case of 'index futures,' say BSE Index Futures, the BSE Index (the Sensex) is the underlying asset.

Derivatives allow taking up either a long position or short position on the contact and reversing the position when it nears the target. There are three instruments available in the market:

One month contract, Two months contract and Three months contract.

The kinds of Derivatives that have been introduced in the stock markets are:

FUTURES: Stock& Commodities Futures and Index Futures

Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash

OPTIONS: Call Options and Put Options

Option Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer/holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.

An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.
Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the