- What are derivatives?
Derivatives are an asset class that in itself has no independent value — it derives its value from the value of its underlying asset, which can be securities, commodities, bullion or currency. Derivatives could be of various types – futures contracts where two parties agree to sell an underlying asset at a fixed price and at a set date in the future, or options contracts where the buyer is not obligated to fulfill their agreement.
- What are the types of derivative markets, and which investors participate in the derivative market?
There are two types of derivative markets – over the counter (OTC), which refers to derivatives traded between two parties directly without the oversight of an exchange and exchange-traded derivatives, where regulated and standardised contracts are traded through a stock exchange. Typically, hedgers, speculators and arbitrageurs (traders who profit by taking advantage of price differences of an asset between different markets) participate in derivatives trading. Derivatives can be used for speculative trading, leading to price fluctuations, especially when large volume contracts are traded.
- What is the Indian scenario?
The derivatives market has seen an exponential rise in trading volume. On the NSE itself, the notional turnover in the equity derivatives segment has increased from ₹237,600,705 crore in 2018-19 to ₹7,835,961,740.03 crore in 2024-25, at a compounded annual growth rate of 64.78 per cent (see chart).
The number of retail traders, or individual traders, has almost doubled in two years from 51 lakh in FY22 to 96 lakh in FY24. Although they contribute only 30 per cent of the total turnover in the derivatives segment in FY24, individual traders constitute 99.8 per cent (by volume) of the total traders in the equity futures and options segment. The proportion of young traders (below 30 years) in the F&O segment rose from 31 per cent in FY23 to 43 per cent in FY24.
According to a Sebi research, this steep growth could be attributed to heightened market awareness, improved access to financial products and increasing volatility in asset prices.
The ability to hedge risk efficiently, leverage positions and speculate on price movements without owning the underlying asset has made derivatives an attractive tool for investors.
- Are investors making money?
Sebi has observed that 9 out of 10 individual trades in equity futures and options segments continue to incur significant losses. The aggregate losses of individual traders exceeded ₹1.8 lakh crore between FY22 and FY24. Despite consecutive years of losses, Sebi’s study showed that more than 75 per cent of loss-making traders continued trading in F&O, which has prompted exchanges to expand their watch and regulators to streamline the policies.
DERIVATIVES IN POP CULTURE
The Big Short, directed by Adam McKay, with an ensemble cast of Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt, depicts the fast-paced events leading up to the financial crisis in 2008 with the collapse of Lehman Brothers, a storied Wall Street firm.
The crisis was triggered by defaults in subprime mortgages in the United States, which in turn hit the value of derivative financial instruments such as collateralised debt obligations and credit default swaps financial instruments such as collateralised debt obligations and credit default swaps.