Derivatives, currency & commodities

Detailed Guide to Derivatives, Futures, Currencies, and Commodities

1️⃣ Derivatives

A derivative is a financial contract whose value is based on the performance of an underlying asset, such as stocks, bonds, currencies, commodities, interest rates, or indices.

Types of Derivatives

• Futures: Agreement to buy or sell an asset at a future date for a set price.
• Options: Provide the right, but not the obligation, to buy or sell an asset before a certain date.
• Forwards: Like futures but traded privately (Over-the-Counter).
• Swaps: Two parties agree to exchange financial flows or liabilities.

Example

A wheat farmer signs a futures contract to sell 100 quintals of wheat at ₹2,000 per quintal in 6 months. If market prices drop to ₹1,800, the farmer still sells at ₹2,000, avoiding losses.

2️⃣ Futures Contracts

What Are Futures?

Futures are legally binding agreements to buy or sell assets at a set price on a future date. In India, they trade on major exchanges like NSE and BSE.

Types of Futures

• Stock Futures:g., Reliance Industries, TCS
• Index Futures:g., Nifty 50, Bank Nifty
• Commodity Futures:g., Gold, Silver, Crude Oil
• Currency Futures:g., USD/INR

How Do Futures Work?

There are two primary players:

• Buyer (Long Position): Expects price rise.
• Seller (Short Position): Expects price fall.

Futures contracts include:

• Expiry Date: Last Thursday of the contract month.
• Lot Size: Minimum quantity (e.g., Nifty Futures = 50 units).
• Margins: Initial and maintenance margins are required.

Examples

Example 1: Nifty 50 Futures

• Nifty 50 at ₹23,800
• Trader buys 1 lot (50 units) expecting price increase

If Nifty rises to ₹24,000 →
Profit = (24,000 – 23,800) × 50 = ₹10,000

If Nifty falls to ₹23,600 →
Loss = ₹10,000

Example 2: TCS Stock Futures

• TCS futures at ₹3,520
• Lot size: 150 shares

If price rises to ₹3,600 →
Profit = ₹12,000

If price falls to ₹3,400 →
Loss = ₹18,000

3️⃣ Options Trading

Options give the right (but not obligation) to buy or sell an asset at a predetermined price before expiry.

Types of Options

• Call Option: Right to buy.
• Put Option: Right to sell.

Key Terms

• Strike Price: The agreed price to transact.
• Premium: The price of the option contract.
• Expiry Date: The date on which the contract expires.
• ITM (In the Money): Option has intrinsic value.
• ATM (At the Money): Market price = Strike price.
• OTM (Out of the Money): Option has no intrinsic value.

Examples

Example 1: Nifty Call & Put Options

• Nifty at ₹23,800
• Buy 23,800 Call Option at ₹150 premium

If Nifty rises to ₹24,200 →
Net Profit = (400 – 150) × 50 = ₹12,500

If Nifty falls to ₹23,500 →
Loss = ₹7,500

• Buy 23,800 Put Option at ₹120 premium

If Nifty drops to ₹23,400 →
Net Profit = ₹14,000

If Nifty rises above ₹23,800 →
Loss = ₹6,000

Example 2: Reliance Call & Put Options

• Reliance trading at ₹1,250

Call Option at ₹30 →
If price rises to ₹1,300 → Profit = ₹5,000

Put Option at ₹25 →
If price drops to ₹1,200 → Profit = ₹6,250

Popular Options Strategies

1. Covered Call
   Hold stock + sell a call.
   Example: Hold Reliance at ₹1,250 and sell ₹1,300 call for ₹30.
2. Protective Put
   Hold stock + buy a put.
   Example: Buy Reliance at ₹1,250 + ₹1,200 put for ₹20.
3. Straddle
   Buy call and put at same strike price.
   Example: Buy Nifty 23,800 Call + Put.
4. Iron Condor
   Combine selling and buying OTM Calls and Puts for low volatility markets.

Summary

• Buy Calls → Expect rise.
• Buy Puts → Expect fall.
• Use strategies → Control risk & maximize profit.

4️⃣ Currencies (Forex Market)

The Foreign Exchange (Forex) Market is the world’s largest financial market, where currencies are traded in pairs (e.g., USD/INR).

How Currency Trading Works

• Buy USD/INR → Expect INR to weaken.
• Sell USD/INR → Expect INR to strengthen.

Example

• USD/INR = 83.00
• Buy $1,000 → Spend ₹83,000

If USD/INR rises to 85.00 →
Your $1,000 = ₹85,000 → Profit = ₹2,000

5️⃣ Commodities

Commodities include raw materials or primary products.

Types of Commodities

• Metals: Gold, Silver, Copper
• Energy: Crude Oil, Natural Gas
• Agricultural: Wheat, Sugar, Coffee

Example

Buy gold futures at ₹60,000 per 10 grams.

If price rises to ₹62,000 →
Profit = ₹2,000

If price drops to ₹58,000 →
Loss = ₹2,000

Conclusion

This guide helps build a strong foundation for understanding the complex yet exciting world of derivatives, futures, currencies, and commodities. The key is to start small, stay informed, and manage risks wisely.