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Types Of Currency Derivatives And Its Implications

Most people invest their saved-up capital in the Stock Market. The lucrative profits attract them to start early. But there is no denying that stock investments are risky. This happens due to the changes in prices of securities like Equity, Commodities, Currency, etc. These changes occur owing to the market conditions.

To avoid this, you should hedge them from risks. You receive several financial instruments for this. They protect you from market volatility. As a result, you can earn steady returns with lower risks. Such devices are called Derivatives. They operate on underlying assets like Shares, Commodities, Currencies, etc. When currency forms the underlying asset, they are called Currency Derivatives. Let us learn about its types and how it gets used:

Classification

There are different types of Derivatives in India. They are easily tradable in the Indian Stock Market owing to their wide acceptance. As each type is different, you need to understand the varying conditions, risk factors, etc. For this, consider the following classification:

Forward Contracts

Here, two parties come together in an agreement. They buy and sell an underlying asset at a fixed price in the future. These contracts are customised and have a high tendency of counterparty risk. Since they are customised, the agreement size depends on the contract terms. These Derivatives do not require any collateral as they are self-regulated.

 

Futures

Like Forward Contracts, they have a similar arrangement of buying and selling underlying assets at a fixed price on a future date. Here, the buyers and sellers disagree. The deal is fixed through exchange mode. Also, the counterparty risk with these types of Currency Derivatives is low. The contract size is set and does not depend on contract terms.

Options

There is a vast difference between Options and Forwards and Futures contracts. This is because they do not require any compulsion to discharge the agreement on a specific date. Besides, they offer the right but are not obligated to buy or sell the underlying asset. They are two types: Call and Put options.

Swap Contracts

These are the most complex in Currency Derivative Trading. Here, the agreement is private between parties. Under Swaps, the underlying asset is the interest rate or the currency. They protect both parties from numerous risks. As investment bankers are intermediaries between these contracts, they do not get traded on the exchanges.

Uses

As Derivatives protect you against risk compared to other securities, they are used for varied purposes. These include hedging, speculating, and arbitraging. Hedgers study the market movement to understand price changes. They try to find stability in the volatile market. Speculating involves betting on the long odds when the market looks appealing.

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A Brief Overview Of F&O Trading

For someone new to financial markets, the terms' future and options' may seem out of place. Typically, most people associate trading with stocks and equity trading. Still, after learning a bit more, they will learn about the various tradeable instruments and derivatives that exchange hands in large volumes daily.

Overview of Derivatives and F&O

Knowing what a derivative is essential to understand futures and options trading better. A derivative is simply a contract that has no intrinsic value. It derives its value from the underlying asset. A change in the price of an asset will lead to a change in the price of the derivative. Futures are derivative contracts. This contract obligates a person to buy or sell a particular asset in the future at a predetermined price and date.

The contracts have an underlying asset and allow traders to use this instrument to speculate the price of the asset or hedge their existing positions. For example, if a trader believes the price of a particular asset is going to increase, they will purchase the future, and if the cost of the underlying moves up before the expiration date of the contract, the trader will be in a profit.

A trader can also short sell a future expecting the price to decrease. This is helpful when a trader wants to hedge their existing investments against adverse price movements. Future contracts are highly leveraged and carry significant risk, but they are a beneficial tool to speculate and hedge stocks, indices, and commodities. Options are derivative contracts as well.

The difference between an option and a future is that the option contract offers the trader a right, not an obligation, to exercise the contract at a predetermined price and date. Since options contracts are derivatives, these contracts' premium depends upon the underlying price. If there is no price change, the premiums' value decreases as the expiration date approaches. There are two types of options contracts:

Call Options: These contracts are bought by traders if they believe that the underlying asset price will increase. Traders can also sell or short these contracts if they speculate the cost of the underlying to go higher or fall from the current levels.

Put Options: Put options are bought by traders when they expect the underlying asset price to fall. Traders can also sell or short them if they expect the underlying asset price to not fall further or to move up from the current levels.

Derivatives futures and options offer traders many different possibilities to trade the markets. These instruments allow traders to generate returns and protect their investments during volatile market conditions. Traders can also make money when the market is not trending. Besides the benefits, derivative trading carries many risks, and a trader should follow proper risk management before trading them.

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A brief overview of the Commodity Market in India

The Indian financial market offers a host of investment options to investors. A fitting example of the same is Commodity Trading. This type of Trading deals in the buying and selling of raw materials. It safeguards investors against inflation and allows them to hedge against unanticipated geopolitical events. Like other Trading types, Commodity Trading also operates in a specific market.

It is known as the Commodity Market. It is a financial marketplace that supports producers, manufacturers, wholesale traders, etc. It offers a price discovery mechanism for the goods and commodities these individuals provide.

Types of Commodity Exchanges in India:

In India, the three leading commodity exchanges are:

The Indian Commodity Exchange (ICEX)

The Multi Commodity Exchange of India (MCX)

The National Commodity & Derivatives Exchange Limited (NCDEX)

Types of commodities traded in India:

Commodities Trading in India ideally falls under any one of the following categories:

Agriculture

This category includes rice, wheat, maise jeera, castor oil, turmeric, yellow peas, etc. 2. Metals & materials

This involves aluminium, copper, iron ore, rare earth metals, etc. 3. Services

This category includes oil services, mining services, etc. 4. Precious metals & materials

Under this category, traders deal in precious metals like gold, silver, platinum, and palladium.

Energy

The energy category includes materials like crude oil, natural gas, alternate energy, etc.

Purpose of Commodity Market:

The Commodity Market contributes significantly to the economic growth of the country. It engenders changes in the following ways:

Fosters agricultural & infrastructural development

It provides farmers, brokers, customers, and intermediaries with an opportunity to garner sufficient profits. As a result, it aids post-harvest infrastructure, warehousing amenities, transport, etc.

It even attracts better investments in the agriculture sector by offering support. This ultimately leads to more developments in the agriculture and infrastructure of the country.

Reduces overall volatility

The market reduces the risk of concentrated threats. It ensures the overall distribution of risk exposure. For instance, a jeweller could sell a gold futures contract to dodge price hikes. On the other hand, an investor can buy a gold futures contract to capitalise on the price hike. The agreement helps reduce overall volatility.

Provides stability and security

The market ensures that suppliers of essential commodities are protected against falling prices. It uses future contracts to lock in specific prices. By doing so, it facilitates an adequate supply of necessities in the country. That way, suppliers have a stable and secure Trading environment.

Offers a reliable platform to suppliers

Earlier, farmers and manufacturers depended on middlemen to sell their products and services. As they had no other option, they had to pay these middlemen whatever they demanded. But the introduction of the Commodity Market changed this scenario. It reduced the need for such intermediaries by serving as a reliable and organised platform. Suppliers feel more confident in selling their offerings at fair price points.

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Why do investors use a Brokerage Calculator?

Before investing, you need to make various calculations. This includes calculating the taxes, anticipated profits, commissions etc. You also need to calculate brokerage charges issued by your broker. For this, you need a value computing tool that will help them. Hence, most traders opt for a Brokerage Calculator. It gives them accurate values of payable taxes, brokerage charges, etc. It assists them in making better-informed investment decisions.

This way, they can enjoy the best deals quickly. While this is just one advantage of it, here are a few others:

Breakdown of charges

A Brokerage Charges Calculator gives you a detailed break-up of trading charges. It helps you estimate the net profit/loss for each trade. As a result, you get a fair idea of what to expect.

Error-free

The chances of making errors through a Brokerage Calculator are nil. The only requirement is to enter the correct details. It will give you the right values. Therefore, traders always refer to it before buying stocks or shares. It saves them from the errors of manual calculations.

Accurate values

A Brokerage Calculator computes accurate values. For example, say you want to find out the turnover fee for a trade. You will have to enter the trade details in the Share Brokerage Calculator. Based on the inputs, it will give you the exact amount. However, this is possible only if you enter the correct information. So, keep this in mind.

Free of cost

Most trading portals provide a Brokerage Calculator free of cost. This implies that you need not pay any extra charges to use it. You can easily avail of it whenever you want. There is no limitation attached to its usage.

Easily accessible

A Brokerage Calculator is accessible to all. You could be a first-timer or a pro-level trader. It is easy to understand and available for everyone. Even new traders do not need an instruction manual to use it.

Comprehensive

Any charges involved in trading may be computed through the All Brokerage Calculator. Some of them include the following:

Custom Duty

General & Service Taxes (GST)

Service Transaction Tax (STT)

Delivery charges

How to use it?

To use a Brokerage Calculator, use the following steps:

Step 1: Go to your trading platform’s home page

Once you reach your online trading platform’s home page, look for the Brokerage Calculator.

Step 2: List out your values

After clicking on the Calculator option, ensure you have your values ready.

Step 3: Enter your values

For every value, you will need to enter different details. For instance, to get your Brokerage value, you will need the following information:

Number of shares bought/sold

Price of one unit of stock

Brokerage percentage

Remember this when calculating values.

  Step 4: Hit calculate

Once you’ve cross-checked your inputs, press the calculate button. Within seconds, you have your results.