What’s a derivative?
When two or more parties make a contract whose values are based on agreed upon underlying financial assets, securities or index, some common instruments that include bonds, currencies, market indexes, stocks, and commodities.
Why the need for derivatives?
It soundtracks one's overall investments, assortment into commodities and currencies which help to increase risk-adjusted returns and at the same time reduce risks.
If traded wisely it can be profitable overpowering losses.
Futures and Options are the two types of derivatives
Futures contract: An agreed upon deal by two parties to buy or sell assets somewhere in the future at an agreed price. These settlements are all in cash at NSE.
Options: An option is an authority, but not the compulsion to sell or buy the necessity at a stated price and on a stated date. While the buyer of an option buys the right to exercise his option by paying the premium, the writer of the option receives the option premium and is obliged to sell or buy the assets if exercised upon by the buyer.
The two types of options are Calls and Puts option. “Calls” gives the buyer rights but not the obligation of buying a given quantity of the asset at a certain price on or before the said given future date.
“Puts” gives the consumer the authority, but not the compulsion to trade a given amount of commodity at a particular price on or earlier than a given future date. All the options contracts are e settled in cash.