Two Types of Derivatives Instruments

Various Derivative Instruments traded

There are two types of derivatives instruments traded; namely Futures and Options:

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. All the futures contracts are settled in cash at an Exchange.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.

Options are of two types - Calls and Puts options:

“Calls” give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

“Puts” give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. All the options contracts are settled in cash.

Further the Options are classified based on type of exercise. At present the Exercise style can be European or American.

American Option - American options are options contracts that can be exercised at any time up to the expiration date. Options on individual securities available at NSE are American type of options.

European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.